Stocks drop in final hour of trading as the S&P 500 heads toward its worst first half since 1970

Stocks drop in final hour of trading as the S&P 500 heads toward its worst first half since 1970

Stocks fell on Thursday, as the S&P 500 prepared to cap off its worst first half in more than 50 years.

The Dow Jones Industrial Average shed 395 points, or 1.9%. The S&P 500 slid 1.3%, and the Nasdaq Composite pulled back by 1.8%.

Thursday marked the final day of the second quarter. The Dow and S&P 500 are on track for their worst three-month period since the first quarter of 2020 when Covid lockdowns sent stocks tumbling. The tech-heavy Nasdaq Composite is down more than 20% over the past three months, its worst stretch since 2008.

The S&P 500 is also on pace for its worst first half of the year since 1970, hurt by worries about surging inflation and Federal Reserve rate hikes, as well as Russia’s ongoing war on Ukraine and Covid-19 lockdowns in China.

“We had the unprecedented pandemic that shut the world down and the unprecedented response, both fiscal and monetary,” Stephanie Lang, chief investment officer at Homrich Berg, told CNBC. “It created the perfect storm with regard to surging demand and supply chain disruptions, and now there’s inflation that we haven’t seen in decades and a Fed that was caught off guard.”

“Now the market is forced to adjust to this new reality where the Fed is trying to play catch up and slow growth,” she added.

A surge in bond yields earlier in the year and historically pricey equity valuations sent tech stocks tumbling first, as investors rotated out of growth-oriented areas of the market. Rising rates make future profits, like those promised by growth companies, less attractive.

The tech-heavy Nasdaq has been hit especially hard this year. The index is now more than 30% below its Nov. 22 all-time high. Some of the largest technology companies have registered sizeable declines this year, with Netflix down 70%. Apple and Alphabet have lost roughly 23% and 24%, respectively, while Facebook-parent Meta has slid 51%.

On Thursday, Universal Health Services fell 5% and helped lead the market lower after it issued second quarter earnings and revenue guidance below expectations, citing lower patient volumes. Shares of HCA Healthcare lost more than 4%. Abiomed and Viatris were lower by more than 2%.

Pharmacy stock Walgreens Boots Alliance was the biggest decliner in the Dow, down 6% after the company reiterated its full-year forecast of adjusted earnings per-share growth in the low single digits.

Cruise stocks continued to drag, after Morgan Stanley cut its price target on Carnival roughly in half Wednesday and said it could potentially go to zero. Carnival shares were down more than 2% Thursday along with Royal Caribbean. Norwegian Cruise Line fell 4%.

Home retail stocks were down too. High-end furniture chain RH saw shares drop about 10% after it issued a profit warning for the full year. Wayfair and Williams-Sonoma fell 8% and 3%, respectively.

Inflation and the economy

The core personal consumption expenditures price index, the Fed’s preferred inflation measure, rose 4.7% in May, the Commerce Department reported Thursday. That’s 0.2 percentage points less than the month before, but still around levels last seen in the 1980s. The index was expected to show a year-over-year increase of 4.8% for May, according to Dow Jones.

The Chicago PMI, which tracks business activity in the region, came in at 56 in June, slightly below a StreetAccount estimate of 58.3.

The Federal Reserve has taken aggressive action to try and bring down rampant inflation, which has surged to a 40-year high.

Federal Reserve Bank of Cleveland President Loretta Mester told CNBC Wednesday that she supports a 75 basis point hike at the central bank’s upcoming July meeting if current economic conditions persist. Earlier in June, the Fed raised its benchmark interest rate by three-quarters of a percentage point, the largest increase since 1994.

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Some Wall Street watchers are worried that too-aggressive action will tip the economy into a recession.

“We do not believe the stock market has bottomed yet and we see further downside ahead. Investors should be holding elevated levels of cash right now,” said George Ball, chairman of Sanders Morris Harris. “We see the S&P 500 bottoming at around 3,100, as the Federal Reserve’s aggressive, but necessary inflation-fighting measures are likely to depress corporate earnings and push stocks lower.”

Courtney Garcia, senior wealth advisor at Payne Capital Management, said even if inflation is peaking, it’s going to stick around for a while longer but that there are still good opportunities for investors in this environment.

“The markets are going to price in the recession before the recession actually happens and that’s what you need to focus on as an investor,” she told CNBC’s “Power Lunch” Thursday. “When you have a period like now where the markets are down more than 15% in the first half of the year, which has happened a couple times in history, they tend to have a really good second half of the year by an average of about 24%.”

However, Lang said that in this current downturn, the Fed is less likely to step in with easy policy to help limit big losses in equities — which has been known since the days of former Fed Chair Alan Greenspan as “the Fed put” — than it has been in the past.

“Inflation is going to persist for a while, so it’s our expectation that the Fed will stay full steam ahead and you won’t have that Fed put that we’ve seen in every other big sell-off in the last decade plus,” she said.