Thursday's Closing Market Update: Down on Economy Concerns
-- Tesla shares nosedive after results disappoint, while a surprisingly large drop in leading economic indicators has added to recession concerns. --
From Schwab Center for Financial Research, April 20, 2023
Major U.S. stock indexes fell Thursday, with the broad S&P 500(r) Index closing at its lowest level in a week, after Tesla (TSLA) reported a sharp drop in profit and updated economic data presented investors with fresh evidence that the economy is slowing.
After the market closed Wednesday, Tesla reported a 24% drop in first-quarter profit, reflecting a string of price cuts enacted this year, sending the electric car maker's stock tumbling more than 10% Thursday. Tesla said its automotive gross margin for the quarter dropped under 16%, excluding regulatory credits, from around 24% in the previous quarter. Its gross profit margin per vehicle sold fell to approximately $6,800, from around $15,700 a year earlier.
And in another sign of the pressure on the economy, the Conference Board said Thursday its Leading Economic Index (LEI), a forward-looking measure of economic conditions, fell 1.2% in March from the month before, leaving it at its lowest level since November 2020. Economists had been expecting a milder 0.4% slowdown.
This year's first-quarter earnings season started strong, with several big U.S. banks posting better-than-expected results, but the enthusiasm may be cooling before most companies have even had a chance to report.
The reports have been "fine so far, but it's too early to suggest it's a trend that will persist throughout reporting season," says Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research. "Along with earnings and recession concerns, the recent rise in bond yields-which reflects ongoing inflation concerns, not stronger growth possibilities-has added to the underlying weakness in stocks."
The 10-year Treasury yield, for example, hit a four-week high above 3.60% earlier this week, up from a seven-month low of 3.278% on April 4.
- The S&P 500 Index was down 24.73 (0.6%) at 4129.79; the Dow Jones industrial average was down 110.39 (0.3%) at 33,786.62; the Nasdaq Composite was down 97.67 (0.8%) at 12,059.56.
- The 10-year Treasury yield was down about 7 basis points at 3.534%.
- Cboe's Volatility Index was up 0.73 at 17.19.
Energy companies were among the weakest performers Thursday, as crude oil prices extended this week's sell-off, with benchmark WTI futures down more than 2% to under $78 per barrel-a low for the month. The real estate and technology sectors also lagged, while consumer staples and transportation sectors held up better.
Earnings roundup
Major companies reporting quarterly results over the past day included:
- AT&T's (T) stock plunged more than 10% after the company's first-quarter revenue of $30.1 billion fell shy of expectations, though net income of $4.18 billion, or 65 cents per share, met expectations.
- American Express's (AXP) shares fell over 2% after the company said it earned $2.40 per share in the previous quarter, about 25 cents short of expectations and despite signs of strong spending by cardholders.
- Zions Bancorporation's (ZION) first-quarter results, reported late Wednesday, included earnings per share of $1.33, about 20 cents under forecasts, while its net interest income also missed expectations. The regional lender's shares fell more than 4%, reflecting concern the recent banking sector turmoil may continue to be a problem.
Results from IBM (IBM), D.R. Horton (DHI), and Union Pacific (UNP) all surpassed earnings expectations.
Earnings to watch Friday include railway CSX (CSX), gold and copper company Freeport-McMoran (FCX), and consumer products giant Procter & Gamble (PG).
Liz Ann attributes most of the S&P 500's solid recent performance to strength in a handful of the biggest companies. Below the surface, though, signs of weakness have emerged. Over the past month, fewer than one-third of S&P 500 stocks have outperformed the index itself, the weakest such performance since 1999.
While such a situation historically hasn't always foreshadowed an "ugly" subsequent period for the S&P 500 (outside of 1999), "there was consistent choppiness over the shorter-term," she says.
Jobless claims increase
Economic numbers this week continued to reinforce concerns a recession may be imminent, if it isn't already here.
The drop in the March LEI is "consistent with worsening economic conditions ahead," Justyna Zabinska-La Monica, an analyst at the Conference Board, says in a statement. Weaknesses in the index's components were "widespread" in March and have been so over the past six months, the analyst says.
"The Conference Board forecasts that economic weakness will intensify and spread more widely throughout the U.S. economy over the coming months, leading to a recession starting in mid-2023," the analyst says.
The labor market showed more signs of slowing Thursday as weekly jobless claims climbed to 245,000, up from 240,000 the previous week and from below 200,000 through much of early 2023.
The LEI reflects a "consistent theme. . .of myriad recessionary warnings," the Schwab Center for Financial Research says in a report.
Nonetheless, the Federal Reserve looks likely to maintain its aggressive stance toward inflation, with the market widely expecting a quarter-point interest rate hike at the central bank's next policy meeting May 2-3.
"Barring any major financial/economic distress, Fed officials have made it clear that they still want to err on the side of doing too much-not too little-when it comes to battling inflation," the Schwab Center for Financial Research says. "Even if the Fed had to pivot right to rate cuts, it wouldn't be bullish for stocks at the outset (as it would imply significant weakness in the economy)."