S&P 500 and Dow touch new 2022 lows as Q3 ends; Nasdaq also falls as Fed worries linger

Matteo Colombo

Despite attempts at a rally earlier in the day, the major U.S. equity averages finished the last session of Q3 with another day of losses on Friday, adding to recent weakness. With investors still concerned about aggressive Federal Reserve policy, the Dow and S&P 500 touched new lows for 2022.

Trading took place amid PCE price data that rose more than forecasters expected. Meanwhile, comments from a top Fed official continued to point to a hawkish stance from the central bank.

The Nasdaq Composite (COMP.IND) ended -1.5%, the S&P 500 (SP500) finished -1.5% and the Dow (DJI) closed -1.7%.

The Dow Jones dropped 500.10 points to finish at 28,725.51. This was its lowest close since November of 2020. Similarly, the S&P 500 retreated 54.85 points to conclude trading at 3,585.62 -- also its lowest finish since November 2020.

The Nasdaq ended the session at 10,575.62, a decline of 161.89. While the Dow and S&P 500 both set intraday 52-week lows during the session, the Nasdaq remained just off its previous 2022 low of 10,565.84, set back in June. Still, this represented the lowest closing price for the Nasdaq since July 2020.

Ten of the 11 S&P sectors finished in the red. This was led by declines in Info Tech and Utilities. Real Estate posted the only positive performance among the major sectors, rising by about 1%.

With Q3 at an end, the S&P 500 is now down more than 25% for 2022 as a whole. The Nasdaq has fallen more than 33%, while the Dow has retreated more than 21%.

"Stocks struggled today and appear to be breaking down after consolidating around the June lows on a technical basis, as credit spreads continue to widen due to economic and monetary policy uncertainty," Michael Kramer of Mott Capital told Seeking Alpha.

Looking ahead, Kramer predicted that corporate earnings figures will increasingly come into focus as the pace of quarterly reports heats up.

"If FedEx, Nike, and Micron are a preview of what is coming, this earnings season may be far more challenging than investors expect," he warned. "Thus far, S&P 500 earnings estimates for the rest of 2022 and 2023 have held up and have seen a very minimal decline. However, we could analysts begin to adjust estimates lower over the first two weeks of October, which could drive the S&P 500 to 3,500."

In the latest hawkish commentary from a Fed official, Federal Reserve Vice Chair Lael Brainard signaled that the central bank was not planning to return to an accommodative stance in the near future.

"Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target, and tighter financial conditions to work their way through different sectors to bring inflation down," she told a conference, according to prepared remarks.

Turning to the bond market, Treasury yields advanced late in the session after generally holding steady earlier in the day. The U.S. 10 Year Treasury yield (US10Y) advanced 8 basis point to 3.83%. Meanwhile, the U.S. 2 Year Treasury yield (US2Y) climbed 7 basis points to 4.24%.

Traders digested a long list of economic statistics during the day. This included the latest PCE price index data, which came in stronger than anticipated. The measure of inflation rose 0.3% month-over-month versus the expected increase of 0.2%.

Moreover, personal spending MoM data for August was 0.4%, higher than the forecasted 0.2%. Personal income MoM for August came in at 0.3%, in line with the consensus figure.

Elsewhere, Chicago PMI figures came in softer than the anticipated. Specifically, the regional manufacturing index hit 45.7 for September, below the 51.8 that was forecast.

At the same time, September University of Michigan consumer sentiment data improved slightly from August. The figure reached 58.6 compared to the 58.2 recorded for August.

Looking overseas, the annual inflation rate in the Euro Area jumped to 10% in September of 2022 from 9.1% in August. The increase has touched a fresh record high in September, preliminary estimates have shown.

"The US Equity markets remain under pressure as we end Q3," Citi outlined in an investor note. "Fed hawkishness is exceeding expectations from a quarter ago, as its determination to drive inflation back to the 2% target was reinforced at the latest Fed meeting."

The firm added: "Gradually, rising rate headwinds on valuation are giving way to concern regarding the economic consequences of current FF rate trajectories.”

Citi noted that while it continues to forecast "earnings resilience into the Q3 reporting period," there are signs that "inflation readings remain sticky" even as "many economic indicators show signs of deterioration."

In another perspective about the current market situation, AllianceBernsein stated: “We believe growth stocks’ valuations are far more attractive today than they were a year ago.”

The firm added, “Active investors should focus on companies with resilient business models and high, consistent profitability, based on metrics such as return on assets and return on invested capital.”

Among active stocks, shares of Nike dropped after efforts to clear inventory hit margins according to its latest Q1 earnings report.