Market Snapshot: Dow trades modestly lower, S&P 500 wavers as traders digest strong retail sales data

What’s driving markets

Stock indexes traded mixed Wednesday after data showed that U.S. retail sales jumped 3% in January, the biggest increase in almost two years. Economists polled by the Wall Street Journal forecasted a rise of 1.9%.

“U.S. stocks softened after an upside surprise with retail sales supports the idea that the Fed can remain very aggressive with fighting inflation,” said Edward Moya, Senior Market Analyst, at Oanda. ​ “The US economy is looking like it will have a solid first quarter and recession doubts are getting some vindication here.”

Meanwhile, investors are revising their initial reaction to news that U.S. inflation remains stubbornly elevated, nudging down stock indexes on concerns the Federal Reserve may keep interest rates higher for longer.

“We do expect an inflection point in inflation, monetary policy, and market sentiment in 2023, however the latest data suggest it is too early to expect a dovish pivot from the Fed,” wrote Mark Haefele, chief investment officer at UBS Global Wealth Management, in emailed comments.

Haefele thinks it will be unlikely for the Fed to have sufficient reasons by its next FOMC meeting in late March to stop hiking rates. On the contrary, they may lift their growth forecasts and the projected rate path trajectory for 2023.

See: Stocks face ‘meaningful’ downside risk amid ‘complacent’ markets: JPMorgan

Wall Street stocks on Tuesday delivered a choppy and ultimately mixed performance after data showed U.S. headline consumer price inflation moderating from 6.5% in December to 6.4% last month.

However, the deceleration in inflation was less than expected and this — along with further hawkish Fed rhetoric — has caused investors to revise expectations for where the central bank may take its policy interest rate to 5.3% this year, while also possibly delaying a cut to borrowing costs until 2024. Just a few weeks ago, traders expected the fed funds rates to potentially peak at 4.9%.

“In the face of strong data, the market is having to reassess how high the Fed goes [with its key interest rate] and how long they hold it there. That is beginning to weigh on the equity market,” said Julian Brigden, president and co-founder of Macro Intelligence 2 Partners.

“You can’t have a rallying bond market and rallying equity market in this environment because you just will not get the weakness to bring down inflation,” Brigden said, in a call.

That said, the tech-heavy Nasdaq Composite, traditionally the most interest rate-sensitive index, has significantly outperformed the rest of the markets even though Treasury yields are rising, suggesting that stock-market investors are still optimistic about high growth stocks on hopes that the Fed will change course this year on its interest rate hiking campaign.

Kevin Barry, chief investment officer at Summit Financial, thinks the bullish sentiment on tech is still there and has not been stamped out.

“The leaders of one bull market are never the leaders of the next bull market all the way back to the 40s,” Barry told MarketWatch via phone. “One of the things that worries me about tech is it goes from a secular thing to a cyclical thing. [The reason why] people kind of refocus on tech is the hope that what they miss last time, they will get this time, and that is human nature.”

A series of interest-rate hikes by the Federal Reserve to tame inflation depressed the price-to-earnings ratio of tech companies in 2022, with the Nasdaq finishing the year down 33%. However, the growth-heavy index has seen its best start to a year since 2000, jumping 15% so far in 2023.

The yield on the 2-year Treasury TMUBMUSD02Y, 4.626% was 4.618% after hitting 4.620% on Tuesday, the highest since Nov. 9. The rate on 6-month Treasury bills
TMUBMUSD06M,
5.009%
rose above 5% for the first time since 2007 on Tuesday.

In other data Wednesday, the New York Federal Reserve’s Empire State business conditions index, a gauge of manufacturing activity in the state, rose 27.1 points in February to negative 5.8, the regional Fed bank said Wednesday. However, that’s still the third month in a row of declining activity.

U.S. industrial output was flat in January, after it recorded a 1% decline in prior month.

Meanwhile, the National Association of Home Builders’ monthly confidence index rose 7 points to 42 in February, the trade group said on Wednesday. This is the second month in a row that sentiment has improved among builders.

Companies in focus

• Airbnb
  ABNB,
  +14.52%
  jumped 14.2% Wednesday after reporting record fourth-quarter revenue and profit to achieve its first profitable year, and executives provided a first-quarter forecast that exceeded Wall Street estimates despite plans for price cuts.

• Roblox Corp.
  RBLX,
  +26.04%
  rallied 25.5% after the gaming company topped bookings expectations for the holiday quarter. 

• Sabre Corp.
  SABR,
  -17.92%
   tumbled 17.5%, after the provider of booking software to the travel industry said travel trends continued to recover, but still reported a wider-than-expected fourth-quarter loss and gave a downbeat first-quarter revenue outlook. 

• Bausch + Lomb Corp.
  BLCO,
  +10.91%
   stocks went up 11.8% after the company said Wednesday it has named Brent Saunders as chief executive and chair effective March 6. Saunders, who will return to the company he headed from 2010 to 2013, will replace Joseph Papa, who is stepping down. 

• AI lending company Upstart Holdings Inc.
  UPST,
  +27.42%
  saw its shares up almost 30% after the company posted a slimmer loss than expected Tuesday afternoon but also delivered an outlook that was far weaker than what analysts were anticipating.

— Jamie Chisholm contributed to this report