Fear swept through financial markets on Thursday, and Wall Street tumbled as concerns resurfaced that the world’s fragile economy could succumb to higher interest rates.
The S&P 500 fell 3.3% in a widespread extinction to more than reverse its jump from a 1.5% surge of a day earlier. Analysts have warned of greater fluctuations given deep uncertainties about whether the Federal Reserve and other central banks could tip the narrow path of interest rate hikes enough to get inflation under control, but not so much as to cause a recession.
The Dow Jones Industrial Average lost 2.4% and was briefly down more than 900 points, while the Nasdaq Composite fell 4.1%. It was the sixth loss for the S&P 500 in its last seven tries, and all but 3% of the shares in the index fell.
Wall Street fell with shares across Europe after central banks there followed the Federal Reserve’s big interest rate hike on Wednesday. The Bank of England has raised its key rate for the fifth time since December, although it has opted for a more modest 0.25 percentage point increase than the 0.75-point hammer brought by the Fed.
Switzerland’s central bank has meanwhile raised rates for the first time in years, a half-point increase. Taiwan’s central bank raised its key rate by an eighth of a point. Japan’s central bank has begun a two-day meeting, though it has refrained from raising rates and making other economy-slowing moves that investors call “faltering.”
Such shifts and expectations for many more have caused investments to tumble this year, from bonds to bitcoin. Higher interest rates slow the economy by design, hoping to eradicate inflation. But they are a blunt tool that can choke the economy if used too aggressively.
“Another concern is that with the change in policy, there has already been a weakening of economic data,” said Bill Northey, senior investment director at US Bank Wealth Management. “It increases the chances of a recession in the latter part of 2022 to 2023.”
The concerns dragged the S&P 500 into a bear market earlier this week, meaning it has fallen more than 20% from its peak. It is now 23.6% below its record set early this year and back to where it was at the end of 2020. It effectively erases 2021, which has been one of the best years for Wall Street since the turn of the millennium.
The S&P 500 fell 123.22 points to 3,666.77. The Dow lost 741.46 to 29,927.07, and the Nasdaq dropped 453.06 to 10,646.10. Thursday’s biggest losses hit the shares of the smallest companies, a sign of pessimism about the economy’s strength. The Russell 2000 Index of Smaller Shares fell 81.30, or 4.7%, to 1,649.84.
Not only is the Federal Reserve raising short-term rates, but it also began this month rolling off some of the trillion-dollar bonds it bought through the pandemic from its balance sheet. This should put upward pressure on long-term interest rates. This is another way in which central banks have snatched away support that they once had for supporting markets to sour the economy.
The US economy is still holding up, especially driven by a strong labor market. Fewer workers applied for unemployment benefits last week than a week earlier, a report showed Thursday. But more signs of trouble emerged.
On Thursday, one report showed that homebuilders broke ground on fewer homes last month. Rising mortgage rates, which stem directly from the Fed’s movements, are digging into the industry. A separate lecture on manufacturing in the Mid-Atlantic region also came as a surprise.
“Corporate earnings estimates have not yet changed to reflect some of the mitigating economic data and this could lead to the second leg of this repricing,” Northey said.
Treasury yields swung sharply on Thursday, with the 10-year yield up to 3.23% from 3.39% late Wednesday. It climbed as high as 3.48% that morning, near the highest level since 2011.
Higher rates have delivered the heaviest hits this year for the investments that have risen the most through the easy, ultra-low rates of earlier in the pandemic, which now seems to be one of the most expensive and risky investments. These include bitcoin and high-growth technology stocks.
Big Tech stocks were among the heaviest on the market on Thursday, but the sharpest losses hit stocks whose gains depend more on the strength of the economy and whether customers can sustain their purchases amid the highest inflation in decades.
Cruise operators Norwegian Cruise Line Holdings, Royal Caribbean Group and Carnival all lost more than 11%.
This is all a sharp turnaround from a day earlier, when equities rose immediately after the Fed’s biggest interest rate hike since 1994. Analysts said investors appeared to be caught up in a remark by Fed Chairman Jerome Powell, who said mega-increases of three-quarters of a percentage point would not be common.
Powell said on Wednesday that the Fed is moving “fast” to bring rates closer to normal levels after last week’s astonishing report which showed that consumer-level inflation accelerated unexpectedly last month, giving up hope that inflation might already peak. reached.
The Fed “is not trying to bring about a recession right now, let’s be clear about it,” Powell said. He called Wednesday’s big increase “front-end loading”.