Economy enters Stronger Downturn

 

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Dow Falls Nearly 300 Points As Economy Enters ‘Stronger Downturn’ And $4 Trillion Options Expiration Fuels Major Volatility

Jonathan Ponciano

4 - 5 minutes

Topline

"The stock market fell for a third-straight session on Friday after manufacturing data added to concerns the economy is headed into a recession—steepening losses that have pushed major indexes to the lowest level in more than a month amid volatility stemming from a swath of options set to imminently expire.

Key Facts

The Dow Jones Industrial Average shed nearly 282 points, or 0.9%, to 32,920 on Friday, while the S&P 500 and tech-heavy Nasdaq similarly fell to one-month lows, dipping 1.1% and 1%, respectively.

Losses intensified after S&P Global reported private-sector firms are ending the year in a "stronger downturn as demand weakness and price pressures bite," with new export orders in December falling for a seventh-month straight and new business across the private sector tanking at the fastest pace since May 2020.

The data "confirmed Wall Street's fears that the economy is quickly headed towards a recession," Oanda analyst Ed Moya said Friday, noting manufacturing activity has tumbled to a 31-month low and positing the deterioration will continue next year as high interest rates, which make borrowing more spending and thereby slow the economy, remain in restrictive territory.

 

Officials have done little to quell those fears: On Friday, New York Federal Reserve President John Williams told Bloomberg Television stubborn inflation will likely warrant higher interest rates for some time, potentially even "higher than what [officials] have written down."

In an email, LPL Financial chief strategist Quincy Krosby said approximately $4 trillion worth of options that could expire in Friday's session are further exacerbating market sentiment, effectively forcing investors to either double-down on risky bets or unwind their positions–the perfect recipe for volatility.

Friday marked a quarterly event in which vast swaths of options trades are set to expire at once—typically driving up market volume, notes Krosby, as quantitative trading firms and hedge funds placing massive market-moving bets are forced to reconsider those positions.

Crucial Quote

"Markets are largely abandoning hope" that easing price pressures will convince central bank officials their job in taming inflation is done, says analyst Adam Crisafulli of Vital Knowledge Media. He notes the pessimism will likely continue over the coming weeks, with the next consumer price index report not slated for release until January 12.

Contra

Though she acknowledges expected stock-market volatility could continue into the first quarter, Laffer Tengler Investments CEO Nancy Tengler says she believes it's now time to start buying stocks during the selloff. She points to waning inflation as a looming benefit for stocks, and she points out stocks in 1982—another period plagued by high inflation—started rising again a few months before the Fed changed its hawkish tone on interest rate hikes. After that, they recouped all their losses in just three months, Tengler notes.

Key Background

Stocks have struggled since the Fed started raising rates in March. According to Goldman Sachs, 2022 is likely to end up as the sixth-most volatile year since the Great Depression. After surging nearly 27% in 2021, the S&P is down nearly 20% this year, and the Nasdaq has tumbled 32%."

Further Reading

Dow Plunges Almost 800 Points After Retail Sales Post Biggest Drop In Nearly A Year (Forbes)

Stock Market Braces For 'Volatile' Trading In Coming Weeks—Here's What To Expect (Forbes)

Fed Raises Rates Another 50 Basis Points—Signals More Hikes To Come Next Year (Forbes)