Stocks Slip Amid Worries of an Economic Slowdown

U.S. stocks fell Wednesday as investors parsed an ambivalent outlook for the global economy and awaited key data about inflation. 

Spring’s bumpy ride continued, sending major indexes sinking through the midday hours after stocks opened the trading day close to flat. The S&P 500 fell 44.91 points, or 1.1%, to 4115.77, and the blue-chip Dow Jones Industrial Average lost 269.24, or 0.8%, to finish at 32910.90. The technology-heavy Nasdaq Composite Index slipped 88.96, or 0.7%, ending at 12086.27.

Those moves, a turnaround from Tuesday’s gains, extended the volatile holding pattern that has ensnared markets in recent weeks.

Equities have rebounded from the May lows that came close to pushing the S&P 500 into a bear market, defined as a 20% fall from a recent high. But investors say sentiment remains fragile and many investors lack conviction in the rebound. At issue is whether the economy can skirt a recession as it faces rising interest rates and inflation that has remained high longer than many economists had been expecting.

Those factors have combined to weigh heavily on major indexes this year, with the S&P 500 down about 14% year to date. Investors’ fixation earlier in 2022 on higher rates—which reduce the relative value of companies’ future profits—has given way to deeper concerns about an economic slowdown, said T. Rowe Price capital-markets strategist Tim Murray. Between those twin fears, traders have had little time to catch their breath.

Recently, the combination of slowing growth and rising prices has raised the specter of stagflation—when growth stalls but inflation drives up prices. The World Bank on Tuesday cut its global growth forecast and warned that conditions in the economy resemble the stagflation of the 1970s. In another sign of slowing economic activity, new data showed that a measure of U.S. mortgage applications fell to its lowest level in 22 years last week, indicating a pullback in the blistering real-estate market.

“Initially, consumers were grumbling about inflation but still spending,” Mr. Murray said. “Now we’re getting to the point where it’s causing them to stop spending.”

U.S. consumer-price index data due Friday will be crucial, said Michael Arone, chief investment strategist at State Street Global Advisors. The data are expected to show inflation in the U.S. held steady at 8.3% in May, on the year. 

Some pandemic-era price surges, like the run up in used-car prices, have persisted even as the economy normalizes. “Are some of those aftershocks starting to get some relief?” Mr. Arone said, highlighting a question that Friday’s data could answer.

Treasury Secretary Janet Yellen appeared before lawmakers for a second day Wednesday, part of two days of testimony discussing the administration’s annual budget request. On Wednesday, Ms. Yellen said the White House is looking into reconfiguring tariffs on Chinese imports as a way to ease inflation.

Western Digital fell $2.50, or 4.1%, to $57.82 after it confirmed reaching a settlement with activist investor Elliott Management that called for it to consider splitting its business. Campbell Soup Co. rose by 71 cents, or 1.5%, to $47.31 after it reported a rise in quarterly sales and lifted its sales guidance for the fiscal year.

Smartsheet fell $2.82, or 6.9%, to $37.76 after the software company reported a wider quarterly loss. Citrus farmer Limoneira rose $2.54, or 22%, to $13.91 after reporting better-than-expected profit.

As companies showed investors their first-quarter results over the past two months, profits generally held up, but with cause for concern lurking just below the surface, said Lisa Erickson, head of public markets at U.S. Bank. Input costs, including wages, have crept higher, and some companies have signaled that earnings will face pressure in the second half of the year.

“Those are items that do sound a note of caution for us,” Ms. Erickson said.

On the other hand, stability in government-bond prices has helped stocks find their footing over the past month, after a sharp bond selloff and corresponding rise in yields to start the year cut into equity valuations. Higher yields on Treasury debt sweeten the appeal of a safer alternative to stocks.

On Wednesday, the yield on the 10-year Treasury note rose to 3.028%, up from 2.969% on Tuesday but below the high of 3.124% reached early last month. Bond yields and bond prices move in opposite directions.

In Europe, the Stoxx Europe 600 fell 0.6%. Credit Suisse Group gained 3.8% after a Swiss website reported that State Street, an American banking giant, was considering a takeover bid for the Swiss bank. Credit Suisse shares had fallen earlier in the day after it warned it expects a third consecutive quarterly loss. A State Street spokesperson said the firm wouldn’t comment on the report.

Industria de Diseño Textil rose 6.4% after the Zara owner said sales jumped despite lockdowns in China closing stores.

In commodity markets, Brent crude, the international oil benchmark, rose 2.5% to $123.58 a barrel. The U.S. benchmark for natural-gas prices fell 6.4% to $8.70 per million British thermal units after a report of an explosion at an export terminal for liquefied natural gas in Texas. An offline LNG facility would reduce U.S. demand for natural gas in the short term.

Japan’s Nikkei 225 rose 1%, while in mainland China, the Shanghai Composite Index edged up 0.7%. Hong Kong’s Hang Seng rose 2.2%, led by strong gains for technology firms.

An index of Chinese tech companies rose to its highest level in three months after regulators approved dozens of videogames for release, signaling that Beijing was softening its stance on tech firms.

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