Good news was bad news for stocks on Thursday. An upward revision to third-quarter gross domestic product (GDP) revealed a surprisingly resilient U.S. economy.
The market recoiled from this pleasant surprise, however, believing it could give the Federal Reserve more room to raise interest rates. Some dour corporate reports also weighed on shares.
Starting with the economic data, the Bureau of Economic Analysis' third estimate of Q3 GDP showed that the U.S. economy was in better shape over the July to September period than previously thought. Real GDP, which is adjusted for inflation, increased at an annual rate of 3.2% in the third quarter, up from a prior estimate of 2.9%. The Q3 data also mark a sharp reversal from the second quarter, in which real GDP contracted 0.6%.
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The Fed, however, is looking to cool down the economy in order to stamp out the worst inflation in four decades. Any data that tends to be supportive of higher interest rates for longer is something the market does not want to see.
"Given that almost 60% of GDP is derived from services revenue, it should not come to a huge surprise that GDP continues to beat on the upside," says David Wagner, portfolio manager at Aptus Capital Advisors. "This doesn't make the Fed's job any easier, as it continues to show the strength of the consumer in the face of higher inflation."
Some downbeat corporate news also hurt the major benchmarks on Thursday. Micron Technology (MU, -3.4%), the largest U.S. manufacturer of memory chips, announced a range of cost-cutting measures amid the worst glut in a decade for semiconductor firms. The chipmaker said it will lay off 10% of its workforce, as current-quarter revenue is forecast to decline by more than management or analysts had forecast. Micron also projected a wider-than-expected loss in the current quarter.
Adding to the market's stress, shares in CarMax (KMX, -3.7%) fell after the auto dealer missed Wall Street's already pessimistic third-quarter revenue and profit forecasts.
At the closing bell, the blue-chip Dow Jones Industrial Average fell 1.1% to finish at 33,027, while the broader S&P 500 declined 1.4% to 3,822. The tech-heavy Nasdaq Composite tumbled 2.2% to close at 10,476.
December, which is historically the second-best month of the year for stocks, has been a huge disappointment in 2022. Since 1928, the S&P 500 has delivered an average price gain in December of 1.4%, per Yardeni Research. This year, the index is off 6.3% for the month-to-date.
Thankfully, traders have a powerful historical trend starting tomorrow, and it might just help salvage some folks' returns.
The Santa Claus Rally, which officially kicks off Friday, is upon us.
For the uninitiated, the Santa Claus Rally covers the final five trading days of the year and the first two trading days of the new year. Few periods can beat the SCR for performance, notes Ryan Detrick, chief market strategist at Carson Group.
"No seven-day combo is more likely to be higher (up 79.2% of the time), and only two combos have a better average return for the S&P 500 than the 1.33% average return during the official Santa Claus Rally period," Detrick says.
Although the Santa Claus Rally might help traders and tacticians add a little window dressing to their 2022 and early 2023 returns, most investors are generally better served by maintaining longer horizons.
Time to Look Towards 2023
As we turn the page on an annus horribilis for equities, it's time to get back to basics.
Investors rebalancing their portfolios for 2023 shouldn't forget that the best blue-chip dividend stocks – and especially the best Dow dividend stocks – never go out of style. It's also critical that investors embrace diversification. Exchange-traded funds (ETFs) – from the best high-yield ETFs to the best bear-market ETFs – will do this automatically for you.
And for folks who like to pick their own stocks, start by scouring everything from the best small-cap stocks to the best growth stocks to the Dogs of the Dow for 2023 for a wealth of potentially market-beating ideas.
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