NEW YORK, Dec 22 (Reuters) - U.S. stocks reversed earlier gains on Friday as investors took a breather ahead of the long Christmas holiday weekend, having digested cooler-than-expected inflation data which firmed bets for Federal Reserve interest rate cuts in the new year.
All three indexes turned lower as the afternoon progressed, after an initial rally on data showing that inflation is inching closer to the U.S. central bank's target.
Small caps handily outperformed the broader market, with the Russell 2000 (.RUT) last up 0.6%.
All three indexes are on track for their eighth consecutive weekly gains, the longest weekly winning streak for the S&P 500 since late 2017.
For the Nasdaq and the Dow, it will mark the longest streak of consecutive weekly gains since the beginning of 2019.
The S&P 500 is now within 1% of its record close reached in January 2022. Should it close above that level, that will confirm the benchmark index has been in a bull market since bottoming in October 2022.
"In the context of what we've seen on a year-to-date basis, it's actually pretty extraordinary what we've seen in the fourth quarter," said Michael Green, chief strategist at Simplify Asset Management in New York. "Small caps continue their absolute tear."
"The Russell 2000 (.RUT) has gone from being down on the year as of August to now being up 15.6% for the year," Green said. "This truly has become an 'everything' rally."
A swath of data was released on the last trading day before the long weekend, notably the Commerce Department's Personal Consumption Expenditures (PCE) report, which showed inflation continues to meander down toward the Fed's average annual 2% target.
A separate report showed new orders for core capital goods landed well above analysts' expectations, an upside surprise that bodes well for U.S. corporate spending plans.
Together, they reinforce the conviction that not only will the central bank begin cutting interest rates as early as March 2024, but it might pull off reining in inflation without tipping the economy into recession, a "soft landing."
"The key question becomes whether there will be lingering (economic) damage from the rate of interest rate hikes that we've already done," Green said. Conversely, if the Fed cuts rates too soon it "risks reigniting inflationary forces in the economy," he added.
Financial markets are pricing in a 74.1% likelihood that the Fed will implement a 25 basis point rate cut in March, according to CME's FedWatch tool.
At 2:28 p.m. ET, the Dow Jones Industrial Average (.DJI) fell 103.91 points, or 0.28%, to 37,300.44, the S&P 500 (.SPX) lost 5 points, or 0.11%, at 4,741.75 and the Nasdaq Composite (.IXIC) dropped 17.31 points, or 0.12%, to 14,946.56.
Nike (NKE.N) tumbled 11.9% after the sportswear maker trimmed its annual sales forecast due to cautious consumer spending.
Nike peers Lululemon Athletica (LULU.O), Foot locker (FL.N) and Dick's Sporting Goods (DKS.N) dipped between 3.0% and 1.3%.
Occidental Petroleum (OXY.N) rose 0.8% after Warren Buffett-led Berkshire Hathaway (BRKa.N) raised its stake in the oil company, bringing it closer to 28%.
Karuna Therapeutics (KRTX.O) soared 47.1% in the wake of Bristol Myers Squib's (BMY.N) agreement to acquire the drugmaker for $14 billion in cash.
Advancing issues outnumbered decliners on the NYSE by a 2.99-to-1 ratio; on Nasdaq, a 2.18-to-1 ratio favored advancers.
The S&P 500 posted 39 new 52-week highs and no new lows; the Nasdaq Composite recorded 166 new highs and 52 new lows.
Reporting by Stephen Culp; Additional reporting by Johann M Cherian, Shristi Achar A in Bengaluru and Richard Chang
