Market Insider

Dow ends lower after Fed official says there’s no rush on 2024 rate cuts

U.S. stocks ended lower Tuesday as investors weighed corporate earnings as well as new comments from a Federal Reserve hawk suggesting there could be less urgency on interest-rate cuts this year.

How stocks traded

  • The Dow Jones Industrial Average
    dropped 231.86 points, or 0.6%, to end at 37361.12, according to Dow Jones Market Data.

  • The S&P 500
    fell 17.85 points, or 0.4%, to finish at 4,765.98. The index is off 0.6% from its record close of 4,796.56 in January 2022.

  • The Nasdaq Composite
    lost 28.41 points, or 0.2%, to close at 14,944.35.

Stocks rose last week, with the S&P 500 finishing Friday at 0.3% off of its record close.

What drove markets

Traders started the week cautiously, weighing a fresh batch of corporate results from banks and downbeat manufacturing news. There was also a reminder that rate cuts may not be around the corner after all.

Federal Reserve governor Christopher Waller said Tuesday morning that the central bank will likely cut rates this year, but that the shift in monetary policy doesn’t have to be “rushed.” In turn, stocks moved lower and bond yields popped higher.

Waller is considered more hawkish, and investors paid attention when he previously said the economy could be slowing enough to address inflation.

Another policy pause is widely expected at the Fed’s January meeting, but there had been a 68% chance that central bankers would carve the fed-funds rate down 25 basis points at their March meeting, according to the CME FedWatch tool. That inched lower to a 63% chance soon after Waller’s remarks Tuesday.

“The market narrative had been as early as possibly March,” said Quincy Krosby, LPL Financial’s chief global strategist. Waller, who she noted is viewed as a “pragmatic hawk,” and others at the Fed now have a “seemingly orchestrated message to markets: Not so fast.”

The chance of a rate cut in March “is very much predicated on incoming data and also, by the way, where oil prices climb higher with regard to issues in the Middle East,” Krosby said.

Read also: No rate cuts in 2024? Why investors should think about the ‘unthinkable.’

At the same time, investors are getting new data points on the economy’s prospects as fourth-quarter earnings start to come in.

Companies reporting earnings Tuesday include Goldman Sachs
Morgan Stanley
and PNC Financial Services
whose reports arrived before the opening bell rang on Wall Street. They are to be followed after the close by Interactive Brokers
and Pinnacle Financial Partners

Those follow Friday’s launch of earnings season that saw several big banks, including JPMorgan Chase & Co.

In commentary, BlackRock Investment Institute experts said earnings could be one of the difference makers for markets.

“We expect greater focus on earnings this year after consensus expectations rose through last year, with up to 11% growth now expected in the next 12 months, LSEG data show. The 2023 [fourth-quarter] earnings season should shed more light on how such expectations will evolve,” said the authors, led by Jean Boivin, head of the BlackRock Investment Institute.

Though companies have kept up profit margins, “we think they will normalize over time due to pressure from higher interest rates, ongoing wage gains and lower if still above-target inflation,” Boivin and others wrote.

“The concern for markets is how much pricing power do companies have at this point,” LPL’s Krosby said.

There was also U.S. manufacturing data to consider on Tuesday. The New York Fed’s factory index fell sharply from negative 14.5 in December to negative 43.7 this month, the lowest level since May 2020. The key is figuring how much, or how little, weight to put on the numbers, observers said.

Investors also have geopolitical ructions to consider. Heightened tensions in the Middle East are raising fears that the disruption of shipping through the Red Sea may add to inflationary pressures. Nevertheless, oil futures moved lower Tuesday.

Companies in focus

  • Morgan Stanley shares
    closed 4.7% lower on Tuesday despite a beat on revenue in the company’s fourth-quarter earnings. Revenue for the bank and broker grew by 1.2% to reach $12.9 billion, beating the FactSet forecast of $11.93 billion.

  • Goldman Sachs Group Inc. shares
    ended 0.1% higher following a fourth-quarter revenue and profit beat from the investment bank. Revenue climbed to $11.32 billion, surpassing the $10.8 billion estimate. The earnings capped a “year of execution” for the bank, according to Chief Executive David Solomon.

  • The release of documents that support a recommendation by the U.S. Department of Health and Human Services to lower the classification of cannabis under federal law, to Schedule III from Schedule I, ignited a rally in cannabis stocks on Tuesday. Curaleaf Holdings Inc.
    was up by 4.4%, Trulieve Cannabis Corp.
    rallied 8.5% and Green Thumb Industries Inc.
    rose 2.7%.

Jamie Chisholm contributed.

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