With the equities market on track to deliver another robust performance for 2023, the question all investors seem to be asking is: Why are stocks down today? While printing figures in red ink clashes with earlier sentiment, it may be part of a healthy consolidation. Looking ahead to the new year, market participants are appreciative of avoiding a recession. Still, history suggests vigilance may be prudent.
In the afternoon session, the benchmark S&P 500 — which is on pace to deliver a return of almost 25% up for the year — slipped about 0.3%. Also, the Nasdaq Composite index is below parity by approximately 0.4% compared to yesterday’s close. Since the beginning of the year, the technology-centric index has gained more than 44% amid rising demand for artificial intelligence (AI).
Further, equities have skyrocketed since hitting a bottom in late October. Pouring fuel on the fire of optimism, Federal Reserve Chair Jerome Powell hinted at the possibility of interest rate cuts next year. That would represent a major paradigm shift. Since 2022, the Fed has aggressively raised borrowing costs in a bid to slow the blistering pace of inflation.
However, with policymakers seeing encouraging disinflationary data, they have grown less hawkish. So, why are stocks down today? Mona Mahajan, senior investment strategist at Edward Jones, stated that it’s unsurprising “to see a little bit more moderation in pace the last few days.”
Why Are Stocks Down Today? A Recession Is Averted, for Now.
Fundamentally, one of the biggest takeaways from the impressive outgoing year is the averting of a much-feared recession. As Yahoo Finance pointed out, several economists — including members of the Fed’s staff — sounded the alarm regarding a recession this year. To be sure, the forecast aligned with sound reasoning.
For one thing, the regional banking crisis — which sparked a modern-day bank run — emphasized the vulnerabilities of the post-pandemic economy. Further, based on well-established historical trends, higher interest rates incentivize consumers to tighten their belts. Subsequently, businesses shy away from expansionary endeavors due to higher loan rates. And that often leads to layoffs.
However, the economy proved more resilient than many experts anticipated. Further, while it ebbed and flowed, the job market has also kept its ship afloat despite macro pressures. So, today’s red ink lacks overwhelming concern. Arguably, by most measures, a disastrous downcycle appears to have been averted.
Nevertheless, it’s also important to realize that prior to the Great Recession, the U.S. economy — again while demonstrating an ebb and flow — showed strong gains. At the time, it led the Bush administration to push for sustained accommodative policies. Adding to the argument, the economy overcame the destruction of Hurricane Katrina and soaring energy prices.
However, a few contrarian experts — including Yale economist Robert J. Shiller — warned of a painful downturn, particularly in the housing market. While Shiller absorbed heavy criticism at the time, history vindicated the professor.
Why It Matters
To be clear, Yahoo Finance notes that analysts disagree over what 2024 will bring. On the one hand, Wedbush analysts state that the acceleration of cloud computing and AI effectively represent undervalued opportunities. And while that may be the case, risk-on sentiment — even in the cryptocurrency space — seems to have taken the deepest breather today.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
