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Stock Market News for May 4, 2023

Wall Street closed sharply lower on Wednesday, dragged down by energy stocks. The sell-off in the market followed an expected 25 bps interest rate hike by the Fed in their May meeting. Economic data released throughout the day showed resilience in the economy. All three major indexes ended in the red.

How Did the Benchmarks Perform?

The Dow Jones Industrial Average (DJI) fell 0.8% or 270.29 points to close at 33,414.24. Twenty-five components of the 30-stock index ended in negative territory, while five ended in positive.

The S&P 500 dropped 0.7% or 28.83 points to close at 4,090.75. All 11 broad sectors of the benchmark index ended in negative territory. The Energy Select Sector SPDR (XLE), the Financials Select Sector SPDR (XLF) and the Materials Select Sector SPDR (XLB) dropped 1.9%, 1.1% and 1.1%, respectively.

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The tech-heavy Nasdaq lost 55.18 points, or 0.5%, to finish at 12,025.33.

The fear-gauge CBOE Volatility Index (VIX) was up 3.2% at 18.34. A total of 12 billion shares were traded on Wednesday, higher than the last 20-session average of 10.5 billion. Decliners outnumbered advancers on the NYSE by a 1.44-to-1 ratio. On the Nasdaq, the ratio was 1.00-to-1.

Fed Hikes Interest Rates for the 10th Consecutive Time

The Federal Reserve, in their May FOMC meeting, raised the federal funds rate by 25 bps on Wednesday, increasing rates for the 10th straight time since March 2022. The rate is now in the 5.00-5.25% range, the peak range expected by the financial markets leading up to this meeting.

Although this quarter-point increase doesn’t stop the central bank from hiking rates again when it meets in June, it is an open question now whether the economy needs further interest rate hikes. While it is true that the economy is still facing high inflation, it is also showing signs of a slowdown, as reflected by the economic indicators and the ongoing financial sector crisis.

"We're closer, or maybe even there," Fed Chair Jerome Powell commented on a potential rate hike pause. However, he warned that inflation remained a chief concern, and it might be too soon to say with certainty that the rate-hike cycle is definitely over. "We are prepared to do more" he said, and that policy decisions from June would be made on a "meeting-by-meeting" basis. He also suggested, in what became a major dampener for investor mood, that with the inflation not coming down very fast, it was highly unlikely that rates would be cut in 2023.

The federal funds rate is now approximately at the level of the debilitating financial crisis that hit the markets a decade and a half ago. What also does not help, is the fact that this level was thought of as “sufficiently restrictive” for the inflation level to come back down to the Fed’s 2% target rate. Inflation is, however, still at a level more than twice that target. Even as the central bank said that there is a bigger chance of avoiding a recession than actually getting into one, investors did not seem to take any comfort, and markets fell.

Oil Prices Extend Losses After Fed Rate Announcement

Oil prices fell around 4% on Wednesday and became the biggest drag on the market amid rising concerns about the economy as the Fed increased the interest rates further by 25 bps.

Brent crude settled $2.99 lower, or 4%, to $72.33/barrel, its lowest close since December 2021. Brent hit a session low of $71.70/barrel, its lowest since Mar 20. WTI crude fell $3.06, or 4.3%, to close at $68.60/barrel. Its session low was $67.95/barrel, the lowest since Mar 24.

Consequently, shares of Marathon Petroleum Corporation MPC and Devon Energy Corporation DVN fell 5.9% and 3.4%, respectively. Marathon Petroleum carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Economic Data

The Institute for Supply Management reported that the ISM Services Index for April had increased to 51.9, against the consensus estimate of 51.8. The index for March was unrevised at 51.2.

Per a government report, for the week ending on Apr 28, 2023, U.S. commercial crude oil inventories decreased by 1.3 million barrels from the previous week. The previous week’s number remained unrevised at a decrease of 5.1 million barrels.

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