Dow bursts higher after US economy grows more than expected

US stocks finished mixed Thursday. Blue chips rallied on the news that America’s economy rebounded in the third quarter, but Big Tech stocks tumbled following weak results from Facebook owner Meta Platforms.

Investors are betting that the Federal Reserve will raise interest rates sharply again next week but could slow the pace of rate hikes after that. The Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index, comes out Friday morning. 

And most corporate earnings reports have been fairly solid. Oil giants Exxon Mobil and Chevron are on tap to report Friday morning.

As stocks settle after the trading day, levels might still change slightly.

Giant multinationals in the Dow and S&P 500 have to deal with the impact of a strong dollar hurting their profits. But smaller American companies don’t have as many challenges related to currency fluctuations and weaker global economies.

So it’s worth noting that the Russell 2000, a top index of small cap US stocks, is beating its bigger rivals lately.

The Russell 2000 is currently on a five-day winning streak, gaining about 6%, and the index rose nearly 10% this month. By comparison, the S&P 500 is up about 4% in the past week and 6% so far in October.

Small cap stocks have been beaten up this year along with the broader market. The Russell 2000 is still down about 20% in 2022. But the recent rebound could be a good sign for smaller companies, particularly smaller growth stocks that could benefit if the US economy and the job market continue to hold up better than the rest of the world.

Gregg S. Fisher, founder and portfolio manager at Quent Capital, wrote in a recent report that he thinks small cap growth may “be in the vicinity of a durable bottom” and that smaller growth stocks could “be on the brink of a dramatic rebound.”

“We believe that this is likely to be an outstanding time to invest in small-cap growth,” Fisher wrote.

Meta’s (META) stunning stock plunge Thursday following lousy earnings wiped out years of gains for long-term investors. Shares of the Facebook owner plummeted 22% to barely above $100. That’s their lowest level since February 2016.

The stock’s massive slide isn’t even its worst for this year though. Shares tanked 26% back in February after Meta reported woeful fourth quarter results, news that helped start the company’s painful slide. Meta shares are now down 70% in 2022.

The big drop in value has hit CEO Mark Zuckerberg hard. Zuckerberg’s net worth tumbled more than 20% Thursday to $37 billion, according to Forbes.

Zuckerberg, who was the third wealthiest person on the planet as recently as September 2021, has seen his rank fall to number 29 on the Forbes list. The net worth of fellow Facebook founder Eduardo Saverin has tumbled too, falling more than 20% to $6 billion.

Meta’s market value has dived from a peak of nearly $1.1 trillion just over a year ago to about $270 billion currently.

Traders working on the floor of the New York Stock Exchange today.

Stocks were mixed in midday trading after Thursday’s GDP report sent conflicting signals about the economy.

While the headline number topped analyst estimates, the gains were largely driven by a rebalancing of imports and exports as consumers shifted their spending from goods to services. Consumer spending grew by 1.4% on an annualized basis which, though better than expected, marks a slowdown from the first two quarters.

The Dow was up 340 points, or 1.1%, on Thursday morning.

The S&P 500 fell 0.1%.

The Nasdaq Composite was down 1.1%.

You probably know the famous quote from the Michael Douglas character Gordon Gekko in the movie “Wall Street.” We’ll leave it to you to decide if “greed, for lack of a better word, is good.” But make no mistake. Greed has returned to the real Wall Street.

The CNN Business Fear & Greed Index, which looks at the VIX volatility reading and six other measures of investor sentiment, is back in Greed mode thanks to the relentless rally in stocks this month.

Just a week ago, the index was still showing signs of Fear. And in late September, the index had a reading of Extreme Fear.

But despite the continued worries about big rate hikes from the Federal Reserve, inflation and a possible recession, investors are giddy. Corporate earnings have, for the most part, been fairly solid. (Just don’t tell that to Meta investors or other traders in big tech stocks.)

Mark Zuckerberg speaks during a virtual Meta Connect event in New York on October 11.

Facebook/Instragram/WhatsApp owner Meta Platforms (META) is hurting right now. Growth has stagnated. Users and advertisers aren’t particularly happy. The company’s push into the metaverse, i.e. virtual/augmented reality, has turned out to be a money pit.

Meta’s Reality Labs division lost a staggering $3.7 billion in the third quarter and has generated red ink totaling $9.4 billion so far this year. And it’s going to get worse!

“We do anticipate that Reality Labs operating losses in 2023 will grow significantly year-over-year,” Meta said in its earnings release.

But if investors are expecting Meta to make any major strategic shifts, they may be deluding themselves. That’s because Meta is CEO Mark Zuckerberg’s company and he is pretty much able to to do whatever he pleases without having to fear Wall Street’s wrath.

Zuckerberg owns a 13.6% stake in Meta, but most of his stock is in the form of Class B shares — which have ten times the voting rights as normal Meta shares. That means Zuckerberg has nearly 57% voting control at the company.

So even though Meta’s stock is now down 70% this year, the only way that the company will change course is if Zuckerberg decides it needs a new strategy or wants to find other seasoned tech and/or media executives to help get the company back on track.

Wall Street simply doesn’t have enough voting power to force Zuck’s hand, virtually or otherwise.

US stocks opened higher on Thursday after the economy grew at a faster-than-expected pace in the third quarter.

US GDP rose at a 2.6% annualized pace for the period between June and September, beating analyst expectations of 2.4%. This was the first quarter of growth in 2022 and eased investors’ worries of an imminent recession. Still, the report showed signs of weakness in business and household spending, indicating that this could be a bump before the slump.

Elsewhere, troubles in the tech sector continued. Facebook-parent Meta Platforms missed on earnings Wednesday afternoon and opened nearly 25% lower. The social media company’s stock is down a whopping 71% so far this year.

The Dow was up 407 points, or 1.2%, on Thursday morning.

The S&P 500 gained 0.4%.

The Nasdaq Composite was 0.2% higher.

Flanked by Vice Chairs of the Board of Governors of the Federal Reserve Lael Brainard and Michael Barr, Federal Reserve Board Chairman Jerome Powell delivers opening remarks to the "Fed Listens: Transitioning to the Post-pandemic Economy" event in Washington, D.D., on September 23.

Solid US economic growth in the third quarter should give the Federal Reserve all the reason it needs to raise interest rates by three-quarters of a percentage point again at its meeting next Wednesday.

According to fed funds futures trading on the CME, investors are still pricing in about a 90% chance of another 75 basis point rate hike on November 2. That’s roughly the same odds as yesterday.

A three-quarter point increase would be the fourth straight hike of that magnitude and would push the Fed’s key short-term rate to a range of 3.75% to 4%.

The Fed is clearly more worried about inflation — the price stability part of its mandate —than an economic slowdown. The 2.6% increase in GDP is a welcome sign, especially as the job market remains healthy. Weekly claims for unemployment benefits are near half-century lows.

But there are growing worries that the Fed may cause a recession by raising rates too aggressively. So it’s possible that the central bank may soon slow down.

Along those lines, the market is pricing in a 38% chance of yet another three-quarter point increase at the Fed’s December 14 meeting, but a 55% probability of just a half-point hike.

Stocks were still set for a mixed open after the GDP report. Dow and S&P 500 futures were higher but the Nasdaq was in red following the awful results from Facebook owner META.

An aerial view of the the Port of Los Angeles in San Pedro, CA, on August 25.

The US economy grew last quarter, bouncing back after shrinking in the first half of the year.

Gross domestic product — the broadest measure of economic activity — rose by 2.6% during the third quarter, according to initial estimates released Thursday by the Bureau of Economic Analysis. That’s a turnaround from a decline of 1.6% in the first quarter of the year and negative 0.6% in the second.

Economists had projected third-quarter growth of 2.4%, according to consensus estimates on Refinitiv.

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The European Central Bank hiked interest rates by three quarters of a percentage point on Thursday, promising further hikes to come as it tackles rising inflation.

The move will take the benchmark rate for the 19 countries using the euro to 1.5%. The central bank has now hiked rates at three consecutive meetings in a bid to get control of inflation even as a recession looms.

“Inflation remains far too high and will stay above the target for an extended period,” the central bank said in a statement. “In recent months, soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand have led to a broadening of price pressures and an increase in inflation,” it added.

Higher food and energy costs drove the eurozone’s annual rate of inflation to a record 9.9% in September, up from 9.1% in August. 

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