U.S. stocks plunged Tuesday as the prospect of higher-for-longer interest rates and letdowns from big-box retailers dampened the mood on Wall Street to start a busy holiday-shortened week.
The U.S. stock and bond markets were closed on Monday for Presidents Day.
The S&P 500 (^GSPC) nosedived 2%, falling below the key 4,000 level, while the Dow Jones Industrial Average (^DJI) shed nearly 700 points, or 2.1%. The technology-heavy Nasdaq Composite (^IXIC) tanked 2.5%.
Investors evaluated quarterly financials from Walmart (WMT) and the Home Depot (HD) for updates on the health of the U.S. consumer, which has so far remained resilient in the face of stubbornly high inflation — most recently evidenced by January's stunning retail sales data out last week.
Walmart, however, warned Tuesday morning that it was cautious about the outlook for the economy and said customers pressured by inflation shopping for lower-priced items may negatively impact margins. The retail giant also issued full-year earnings guidance below Wall Street estimates. Shares closed slightly higher after paring losses from early in the session.
"The consumer is still very pressured, and if you look at economic indicators, balance sheets are running thinner and savings rates are declining relative to previous periods," Walmart chief financial officer John David Rainey said during an earnings call. "And so that’s why we take a pretty cautious outlook on the rest of the year."
MIAMI, FLORIDA - JANUARY 24: A worker stocks the shelves at a Walmart store on January 24, 2023 in Miami, Florida. (Photo by Joe Raedle/Getty Images)
The picture was similar for home improvement retailer The Home Depot, which also reported disappointing fourth quarter results and said it was in for a challenging 2023. Shares slid 7.1%.
Speculative technology stocks, which led the rally higher to start the year, were taking a beating on Tuesday. Cathie Wood's Ark Innovation ETF (ARKK) plopped 6.1%. Tesla (TSLA) spiraled down 5.3% after rising for six back-to-back weeks.
Morgan Stanley's Mike Wilson wrote in Tuesday morning note that "the bear market rally that began in October from reasonable prices and low expectations has morphed into a speculative frenzy based on a Fed pause/pivot that isn’t coming."
On Friday, the Dow Jones Industrial Average logged its third-straight losing week for the first time since September, closing down 0.1% for the five-day trading period. The S&P 500 fell 0.3% for the week, its second consecutive week in the red, while the Nasdaq was an outlier, notching a weekly gain of 0.6%.
"Investors are waking up to the realization that fresh interest rate hikes will be needed in the US — perhaps as many as three in quick succession — to tame the price spiral and that’s set to send consumers more cautious," Susannah Streeter, head of money and markets at Hargreaves Lansdown, said in emailed comments.
In other areas of the market, Treasury yields ascended, with the benchmark 10-year note rising 12 basis points to top 3.9%, the highest level since November. The U.S. dollar also advanced.
"Rising rates due to the market’s repricing of a potentially higher for longer monetary policy path have weighed on risk appetite," Adam Turnquist, chief technical strategist for LPL Financial said in a note. "Benchmark 10-year Treasury yields have now cleared key resistance at 3.90%, elevating upside risk in yields, which will likely continue to weigh on equities."
A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., February 17, 2023. REUTERS/Brendan McDermid
Later in the week, Wall Street will get a readout of minutes from the Federal Open Market Committee's last meeting earlier this month.
The release will offer clues about the next rate increase in March, which some investors are now expecting to be 50 basis points after strong economic data and hotter-than-projected inflation readings.
Last week, Cleveland Fed President Loretta Mester said she would have favored raising interest rates by 50 basis points Feb. 1 rather than the smaller quarter-point rate increase her colleagues opted for.
Traders fretting over inflation and the path forward for interest rates also await the Personal Consumption Expenditures (PCE) price index — the Fed's most closely watched assessment of how quickly prices are rising across the economy — which is set for release Friday morning.