Harsh End to a Tough Week as Major Indices Continue Selloff on Recession Fears

(Friday Market Close) Ideas that the Fed and other central banks could potentially hike the global economy into a recession sent stocks slumping to three-month lows amid dramatic losses Friday.

Concerns about global growth sparked more selling Friday. The Fed and other central banks seem willing to sacrifice growth to get inflation under control, and it looks like the market impact of this is starting to accelerate.

It would probably be best to be very careful about deploying capital at this point because things are all over the place. As a trader, you might want to adjust your trade sizes, check your risk management strategy, tighten up any stops, and reconsider your possible entry and exit points.

Friday’s action on Wall Street showed little evidence of investors wanting to get in on the long side ahead of the weekend. The question is how things start out Monday. Remember to check on the futures market late Sunday to get an early read. More weakness Sunday night into Monday morning could indicate that there’s a significant change in the risk appetite with the growth outlook so uncertain.

Market Movers

Through much of the day Friday, the Energy sector got hit the hardest as U.S. crude oil futures slipped below $79 a barrel for the first time since early January.

While this might promise more relief at the pump for U.S. drivers, it’s a troubling development for the stock market because energy is where a lot of Q3’s earnings growth is expected to come from. A major change in the crude outlook could hurt bottom lines across that industry, which could bring wholesale changes in the general forecast for S&P 500 earnings across the board.

Even before Friday’s downturn in the market, analysis firm FactSet lowered its projection for Q3 S&P 500 earnings growth to 3.2%. That’s down from a 9.8% prediction back on June 30. Negative guidance from many companies over the last few months has led to Wall Street’s earnings estimates coming down significantly, particularly in Communication Services, Materials and Consumer Discretionary, according to FactSet.

Small-caps took it on the chin Friday, and those stocks are very closely related to the U.S. economy. In fact, small-caps have been hit pretty hard all week, and they include many smaller regional banks, Health Care companies and Energy firms. Anyone betting against small-caps is likely not optimistic about U.S. growth prospects.

From a technical standpoint, it would have been constructive if the S&P 500® Index (SPX) could have held 3,700 today, but that didn’t happen. Today’s close below 3,700 may result in the market having to find a level of support below that, and we haven’t been down there much so it’s hard to find a discernable support level. The SPX hasn’t traded below 3,600 since late 2020.

One place to possibly look for stability next week would be in some of the biggest names on Wall Street. Sometimes investors flock to the “mega-caps” in tough times, seeking some sort of stability. We saw that in early 2020 when the pandemic sell-off occurred.

Volatility swung much higher Friday after spending much of the week in more moderate territory. The Cboe Market Volatility Index (VIX) was above 32 by late in the session, up from below 26 earlier in the week.

There aren’t any major data or earnings on the calendar this afternoon or Monday to really drive things in a different direction. This might mean the market remains focused on what’s front and center, which happens to be the same metrics driving it down all week: the strong dollar and rising interest rates.

If there’s any positive takeaway Friday, it’s that the major indices closed well above session lows, clawing back a bit in the final minutes. This follows huge sell-offs at the close on Wednesday and Thursday. Also, the SPX managed to close just slightly above the June 16 closing low after failing to take out the June 16 midday low of 3,636 intraday. The Dow Jones Industrial Average ($DJI) did set a new low for the year, however.

As noted here this morning, these are tough times, and it’s hard to watch your accounts lose ground. However, be careful not to let emotions factor into your buying and selling decisions.

Reviewing the Market Minutes

The Nasdaq ($COMP) fell 1.8% to 10,867. The SPX fell 1.72% to 3,693. The Dow Jones Industrial Average ($DJI) fell 1.62% to 29,590, a new closing low for the year.

Some of the biggest losers among major shares on Friday included Chevron (CVX) falling more than 6% amid a general hammering of Energy stocks as crude lost ground. Boeing (BA) fell more than 5%, Caterpillar (CAT) slid more than 3%, and Goldman Sachs (GS) fell more than 3%, as well.

Generally, stocks related to consumer demand, including airlines and vacation-related firms, had tough days on Wall Street as recession fears grew. Energy was by far the worst-performing sector, down more than 6%. But every sector finished in the red. Utilities, Health Care, and Information Technology fell the least.

The U.S. Dollar Index ($DXY) hit a new 20-year high intraday above 113. The dollar often attracts investors during times of market volatility and uncertainty. Gold, which often trades inversely to the dollar, hit a two-year low below $1,650 an ounce.

The 10-year Treasury yield slid from recent highs to trade at 3.68% by the close, while the rate-sensitive 2-year Treasury yield actually rose to 4.19% after topping 4.2% during the day. This means the yield curve finished the day even more inverted, typically a bad sign for economic growth.

CHART OF THE DAY: . You may remember the price channel on the S&P 500 (SPX--candlesticks) we’ve referred to a couple times to help us follow the downtrend, some technical analysts might expect some buying to come in at these levels (white box) in the short term, but the technician mantra is “the trend is your friend” so the assumption would be that the downtrend would continue sooner or later. Data Source: S&P Dow Jones Indices. Chart source: the thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Notable Calendar Items

Sep 23: S&P U.S. manufacturing and services PMI, scheduled public appearances for Fed Chairman Jerome Powell and Fed governor Michelle Bowman

Sep 27: Durable goods orders, CB consumer confidence, New home sales and earnings from Cintas (CTAS), Jabil Circuit (JBL), BlackBerry (BB), Cal-Maine Foods (CALM), and Cracker Barrel (CBRL)

Sep 28: Pending home sales and earnings from Paychex (PAYX)

Sep 29: Gross Domestic Product (GDP) and earnings from Nike (NKE), Micron (MU), CarMax (KMX), Carnival (CCL), and Bed Bath & Beyond (BBBY)

Sep 30: Personal Spending, Chicago PMI, Michigan Consumer Sentiment

Oct. 3: September ISM Manufacturing PMI

Oct. 4: August Factory Orders, and earnings from Acuity Brands (AYI).

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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