A recession looks less likely, and fewer Americans are unemployed. That was bad news for stocks on Thursday.
The major indexes fell sharply as fresh economic data revived worries about the Federal Reserve’s attempts to battle inflation.
“We’re still in a bit of ‘good news is bad news for the market,’ because better-than-expected economic data means the Fed’s going to remain more restrictive on their policies,” said Jonathan Krinsky, chief market technician at the brokerage firm BTIG.
The number of Americans filing new claims for unemployment benefits increased less than expected last week, Labor Department data showed on Thursday, suggesting that the job market remained tight. At the same time, an update on gross domestic product indicated that the economy rebounded faster in the third quarter than previously estimated.
Combined, the economic reports suggested to investors that the Federal Reserve might need to continue to push interest rates higher and hold them there longer in an attempt to slow the economy.
The State of Jobs in the United States
Economists have been surprised by recent strength in the labor market, as the Federal Reserve tries to engineer a slowdown and tame inflation.
In afternoon trading, the S&P 500 was down nearly 3 percent and the tech-heavy Nasdaq index down roughly 3.7 percent. By the end of the day, each index had regained some ground. The S&P and the Dow fell 1.4 percent and 1 percent, while the Nasdaq finished 2.2 percent lower.
Stock trading has been volatile throughout the week as investors have grappled with the Fed’s resolve to remain aggressive in its fight against inflation. Fed officials indicated last week that interest rates would rise more drastically than many had expected as policymakers tried to wrangle stubborn price increases.
“We have more work to do,” Jerome H. Powell, the Fed chair, said last week. His message echoed around the world as central banks in Europe also announced new rate increases.
Selling intensified on Thursday after David Tepper, the billionaire founder of the hedge fund Appaloosa Management, said on CNBC that he was betting that stock prices would continue to fall.
“As a hedge fund manager, I’m going to lean short,” Mr. Tepper said, citing the global movement by central banks to use higher interest rates and other monetary tightening measures to try to slow inflation.
“I think the upside/downside just doesn’t make sense to me when I have so many people telling me, so many central banks telling me what they’re going to do,” he said.
The latest update on gross domestic product showed that the U.S. economy grew at an unexpectedly strong 3.2 percent annual pace from July through September. That was up from an earlier estimate of 2.9 percent. The quarterly growth followed a contraction during the first half of the year.
Investors will get another update on consumer spending and inflation on Friday, when the government releases the Personal Consumption Expenditures index for November. The Fed monitors the report as a barometer of inflation.
Despite Thursday’s strong numbers, recent economic data have been mixed. Experts expect Friday’s report to show that inflation continued to cool in November.
To Mr. Krinsky, Thursday’s sell-off was not a surprise. Stock price movements in December, especially at the end of the month, tend to echo whatever longer-term trend is already in place. Fewer market participants are around to trade, and it is unlikely that they will make bold bets at this time of year.
“We’re still in a bear market,” Mr. Krinsky said, adding that he viewed stock prices as being caught in a lose-lose scenario for the rest of the year.
“If economic data is better, the Fed’s going to remain restrictive, and if economic data deteriorates we’re probably heading into a much deeper recession. That’s the lose-lose proposition for the market right now,” he said.
