US stocks struggle to rebound from ‘crazy’ rally as earnings season begins

U.S. stocks saw their first gains tumble on Friday as the market turned south after trying to build on a rebound in the previous session that marked what has been called one of the days of craziest market in history.

Stocks fell after a closely watched survey showed consumer inflation expectations were on the rise, while investors also weighed a series of results from major Wall Street banks as the stock market reporting season profits began.

What is happening
  • The Dow Jones Industrial Average DJIA,
    -1.05%
    fell 223 points, or 0.7%, to 29,815, after rising 390 points to its session high.

  • The S&P 500 SPX,
    -1.87%
    was down 58 points, or 1.6%, at 3,612.

  • The Nasdaq Composite fell 227 points, or 2.1%, to 10,422.

On Thursday, the Dow Jones erased a nearly 550-point plunge to end 828 points higher, while the S&P 500 rebounded from a loss of more than 2% to end 2.6% higher, and the Nasdaq Composite jumped 2.2%.

The 2.8% rise in the Dow Jones was the largest one-day rise since November 9, 2020.

See: Why Stocks Have Recorded a Historic Rebound After Another Hot Inflation Report

What drives the markets?

Early Friday gains gave way to losses after the University of Michigan consumer sentiment survey showed inflation expectations over the next year rose to 5.1% from September’s 1-year low of 4.7%, while inflation expectations over the next 5 years rose to 2.9% from 2.7% last month.

“The rise in inflation expectations is likely a response to the rise in gasoline prices in recent weeks, in which case it will not continue,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note. , observing that preliminary readings tend to see the big revisions.

“Still, on the heels of September inflation data, this rebound – reversing last month’s decline – doesn’t look good, given how closely policymakers appear to be watching the measure,” Shepherdson said.

The survey’s consumer confidence indicator rose from 58.6 to 59.8 in October. Economists had expected a reading of 59, according to a Wall Street Journal poll.

Friday’s data also showed U.S. retail sales were unchanged in September, below expectations for a 0.3% rise. Excluding automobiles, sales increased by 0.3%.

Analysts cited a number of factors to explain Thursday’s huge rally in stocks, which came after stocks initially fell following a warmer-than-expected consumer price index reading in september.

Factors behind the rebound included technical and positioning considerations after a strong sell-off that saw the S&P 500 index fall for six consecutive sessions to end Wednesday at its lowest level since November 2020.

“One of the most common explanations is that the most pessimistic of all possible scenarios has been priced in: a 75 bp rate hike in the next two meetings,” said Alex Kuptsikevich, senior market analyst at FxPro. , in a footnote. “After that, market players turned to substantial price discounts from their highs with a relatively healthy economy that continues to create jobs and raise wages,”

But caution still prevailed on Friday.

“Despite October’s notoriety as a ‘bear market killer’ and an auspicious intraday move, investors should maintain a degree of caution. A true change in trend requires a change in fundamentals. And those changes are not still not easy to identify,” Kuptsikevich said.

Rick Rieder, chief investment officer for fixed income at BlackRock, told MarketWatch’s Christine Idzelis that Thursday’s swings marked one of the “craziest” days in market history, after data showed that US inflation in September unfolded at a higher pace than expected.

“One of the largest intraday reversals in recent memory on a closely watched IPC print underscores the oversold condition and extreme sentiment in this market. The vulnerability was not in the number, the vulnerability was in the positioning leading to the number said Jeff deGraaf, founder of Renaissance Macro Research, in a Friday note.

BlackRock’s Rieder advised investors to consider putting their money in short-term bonds, a point recently echoed by hedge fund legend Ray Dalio.

Shares of JPMorgan Chase & Co.
JPM,
+2.57%
rose 2.7% after the bank and the Dow component beat Wall Street’s profit and revenue targets.

Analysts were also evaluating the results of Wells Fargo & Co.
WFC,
+3.30%
and Morgan Stanley
MRS,
-4.70%,
and Citigroup Inc.
VS,
+1.13%.

See: JPMorgan profit drops but beats estimates as Wells Fargo misses

Investors were also watching developments in the UK, where Prime Minister Liz Truss sacked Kwasi Kwarteng as Chancellor of the Exchequer. Yields on UK government bonds soared after Kwarteng presented a budget plan including major tax cuts at the end of September, triggering a crisis that forced the Bank of England to intervene with a purchase program emergency.

Lily: Why Kwasi Kwarteng couldn’t survive the battle with the Bank of England

UK bond yields initially fell on Friday on indications that many of the planned tax cuts would be undone. But they later rose after Truss only reversed the corporate tax cuts.

Also see: Larry Summers says UK debt market stress could be the ‘tremor’ signaling a global economic ‘earthquake’

The Federal Reserve needs to keep raising interest rates, but needs to be careful of the pace of those moves, Kansas City Fed Chair Esther George said Friday.

Companies in the spotlight
  • Wells Fargo WFC,
    +3.30%
    Shares rose 3.8% after the bank posted higher-than-expected third-quarter revenue, making up for a shortfall.

  • Morgan Stanley MS Shares,
    -4.70%
    fell 4.5% after the investment bank missed Wall Street’s profit and revenue targets amid falling deal activity.

  • Group C,
    +1.13%
    shares rose 1.9% after the bank beat Wall Street forecasts for profit and revenue.

  • UnitedHealth Group Inc.
    A H,
    +1.27%
    Shares rose 1.6% after the Dow component and the health insurer reported third-quarter earnings and revenue that beat expectations, and raised their full-year outlook for a third consecutive quarter.

  • Kroger Co.
    KR,
    -5.50%
    announced a $24.6 billion deal to buy Albertsons Cos. Inc.
    ICA,
    -7.40%.
    Under the terms of the merger agreement, Kroger will acquire all of the outstanding shares of Albertsons common and preferred stock for an estimated $34.10 per share. Kroger shares fell 4.9%, while Albertsons lost 7%. Shares of Albertsons jumped more than 11% on Thursday on reports of a potential deal, while Kroger rose 2%.

  • Beyond Meat Inc.
    BYND,
    -6.22%
    shares fell 6.2% after the plant-based food company issued a revenue warning, announced a plan to cut about 200 workers and said it was cutting other costs as she was making a strategic change to achieve positive cash transactions.

Also see: Beyond Meat COO Douglas W. Ramsey quits the company after being suspended for allegedly biting a man’s nose

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