Dow drops 400 points as economic data fans rate hike worries

Santa Claus ain’t coming to town – or at least to Wall Street.

The stock market resumed its December losing streak on Thursday as investors got spooked by the prospect of more interest rate hikes due to the continued growth of the economy.

The Dow Jones Industrial Average tumbled more than 700 points at one point before paring its losses to end the day down 348.99, or 1.1%. The S&P 500 was down 1.5%, and the Nasdaq was down 2.1%.

With the penultimate week of a dire year drawing to a close, hopes of a “Santa Claus rally” in the last days of 2022 are fading as investors prepare to close the book on the worst year for the stock market since 2008, the nadir of the Great Recession.

“2008 was a horrible year,” said Keith Buchanan, portfolio manager at GLOBALT Investments in Atlanta. “That bad market followed you home.”

But in 2022, “there was nowhere to hide, the pain is more widespread,” Buchanan added.

The federal government released data on Thursday showing that GDP rose 3.2% year over year in the third quarter — beating estimates of 2.9%. The revised GDP data coupled with stubbornly high rates of inflation have stoked renewed fears that the Fed would continue its hawkish monetary policy.

“The GDP data beat a lot of expectations. There are concerns that the economy is not giving up too easily and it’s putting up a fight that will likely require the Fed to remain hawkish and keep interest rates higher for longer,” Sam Stovall, chief investment strategist at CFRA Research in New York, told Reuters.

Stovall likened hopes of avoiding a recession to a “deflating holiday lawn ornament,” adding that “investors have given up on the prospect of a soft landing and now have to decide just how hard the landing will be.”

Last week, Fed Chairman Jerome Powell said he expects interest rates to remain higher for longer, sparking a selloff across stock markets.

The bets for a 25-basis point hike to 4.5%-4.75% in February by the Fed remained largely unchanged at around 70% following the data on Thursday, although expectations for the terminal rate inched up to 4.89% by May 2023. 

Meanwhile, a Labor Department report showed the number of Americans filing for state unemployment benefits increased to 216,000 last week, much below economists’ estimate of 222,000, indicating a still tight labor market.