The Dow Jones Industrial Average falls 390 points, as Goldman Sachs shares drop 6.46 percent.

On Tuesday, U.S. stocks closed mixed, with the Dow Jones Industrial Average closing down 390 points. Investors continue to focus on the risk of a U.S. recession and the Fed’s policy outlook as they review the latest earnings results of big banks such as Goldman Sachs and Morgan Stanley.

The Dow

The Dow fell 391.76 points, or 1.14%, to close at 33910.85. Meanwhile, the Nasdaq rose 15.96 points, or 0.14%, to 11095.11, and the S&P 500 fell 8.12 points, or 0.20%, to 3990.97.

Big Banks Report Earnings

A number of large banks continue to report earnings. Goldman Sachs shares closed down 6.46 percent, becoming the biggest faller for the Dow 30 component, after the bank reported its worst earnings decline in the fourth quarter. Goldman said its results were under pressure from falling revenues from investment banking and asset management. Morgan Stanley, however, beat expectations, thanks in part to record revenue in its wealth management division. The announcement follows mixed results from JP Morgan Chase and Citigroup and other big banks.

Earnings Beat Expectations

As of Tuesday morning ET, about 7% of the S&P 500 component companies had reported earnings. Of those companies, 70% of earnings beat expectations. United Airlines will report its quarterly results after the close on Tuesday.

New Year, New Market

Entering 2023, the U.S. stock market has recorded two consecutive weeks of gains. In the first two weeks of the New Year, the Nasdaq rose 5.9% as investors bought already battered technology stocks as the outlook for growth stocks improved. The S&P 500 rose 4.2% and 3.5% respectively over the same period.

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Inflation and the Fed’s Policy

Investors see the first batch of inflation-related data this year pointing to a contraction in the U.S. economy, but they will also give the Fed reason to slow the pace of rate hikes. Last week, the December consumer price index showed that prices fell 0.1% from the previous month, but were still up 6.5% from a year earlier.

Risk of Recession

Economists also widely see the risk of a recession this year, and that many companies could accelerate layoffs in the second quarter. According to a survey of 71 economists in business and academia, there is a 61 percent chance of a recession in the next 12 months. That probability is down 2 percentage points from the October survey, but remains at a record high.

Concerns Over Fed’s Policy

Three-quarters of respondents believe that while the Fed expects to reduce inflation by slowing economic growth rather than shrinking across the board, the Fed may eventually be unable to adequately address the problems of excessive rate hikes and underinvestment. The expected “soft landing” for the economy may not happen, and high inflation and the Fed’s policy efforts to curb inflation will be the biggest risks to the economy this year.

GDP Growth

The survey also showed that GDP is likely to grow just 0.1% in the first quarter, expected to shrink 0.4% in the second quarter, zero growth in the third quarter and 0.6% in the fourth quarter. For all of 2023, the U.S. economy is likely to grow by just 0.2%.

Conclusion

According to the survey results, there is still a debate over whether and when the U.S. recession will come. ZipRecruiter Chief Economist Julia Pollak said, “I do think that this issue may be more uncertain

What was the Dow's closing on Tuesday?

The Dow fell 391.76 points, or 1.14%, to close at 33910.85.

How did Goldman Sachs and Morgan Stanley perform in their earnings reports?

Goldman Sachs reported its worst earnings decline in the fourth quarter and its shares closed down 6.46 percent. Morgan Stanley beat expectations, thanks in part to record revenue in its wealth management division.

How have the S&P 500 and Nasdaq performed in the first two weeks of the New Year?

In the first two weeks of the New Year, the Nasdaq rose 5.9% and the S&P 500 rose 4.2% and 3.5% respectively.

What is the current outlook for inflation and the Fed's policy?

Investors see the first batch of inflation-related data this year pointing to a contraction in the U.S. economy, but they also give the Fed reason to slow the pace of rate hikes. Three-quarters of respondents believe that while the Fed expects to reduce inflation by slowing economic growth rather than shrinking across the board, the Fed may eventually be unable to adequately address the problems of excessive rate hikes and underinvestment.

What is the current risk of a recession?

Economists widely see the risk of a recession this year, and that many companies could accelerate layoffs in the second quarter. According to a survey of 71 economists in business and academia, there is a 61 percent chance of a recession in the next 12 months.

What is the expected GDP growth for 2023?

The survey showed that GDP is likely to grow just 0.1% in the first quarter, expected to shrink 0.4% in the second quarter, zero growth in the third quarter and 0.6% in the fourth quarter. For all of 2023, the U.S. economy is likely to grow by just 0.2%.

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