A NYSE symbol is seen on the floor at the New York Stock Exchange in New York on Wednesday, June 15, 2022.
Shares fell on Wall Street on Thursday as concerns resurfaced that the world’s fragile economy could bow under high interest rates.
The S&P 500 fell 3.3% in a broad path to reversing its blip of a 1.5% rally from the day before. Analysts had warned of more large volatility, given deep uncertainties about whether the Federal Reserve and other central banks could follow the narrow path of raising interest rates to keep inflation under check, but not enough. Not that they cause a recession.
The Dow Jones Industrial Average fell 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 seven previous attempts, and all but 3% of the shares in the index fell.
Wall Street fell along with stocks across Europe after central banks followed the Federal Reserve’s big interest rate hike on Wednesday. The Bank of England raised its key rate for the fifth time since December, though it opted for a marginal increase of 0.25 percentage points compared to the 0.75-point hammer brought in by the Fed.
Swiss Central Bank hikes interest rate
Meanwhile, Switzerland’s central bank raised rates by half a point for the first time in years. Taiwan’s central bank raised its key rate by an eighth of a point. Japan’s central bank began a two-day meeting, though it has been held up over raising rates and other economy-slowing moves that investors call “hawkish”.
Such moves and very high expectations have driven investments from bonds to bitcoin this year. High interest rates slow the economy by design, in hopes of stamping out inflation. But they are a blunt tool that can squander the economy if used too aggressively.
“Another concern is that with policy changes, there are already weak economic data,” said Bill Northey, senior investment director at US Bank Wealth Management. “This increases the likelihood of a recession in 2023 through the latter half of 2022.”
‘Recession not inevitable’
President Joe Biden told the Associated Press on Thursday he saw reasons for optimism about the economy and said a recession “is not inevitable.”
Concerns earlier this week dragged the S&P 500 into a bear market, meaning it was down more than 20% from its peak. It is now down 23.6% from its record set earlier this year and is back at the end of 2020. This effectively wipes out 2021, which was one of the best years for Wall Street since the turn of the millennium.
The S&P 500 fell 123.22 points to end at 3,666.77. The Dow closed down 741.46 at 29,927.07 and the Nasdaq fell 453.06 to 10,646.10. The biggest losses on Thursday were on stocks of the smallest companies, a sign of pessimism about the strength of the economy. The Russell 2000 Index of smaller stocks fell 81.30, or 4.7%, to 1,649.84.
Not only is the Federal Reserve raising short-term rates, but this month it has also begun allowing the few trillion-dollar bonds purchased through the pandemic to roll off its balance sheets. This should create upward pressure on long-term interest rates. This is another way that central banks are snatching the support they previously held beneath the markets to juice up the economy.
The US economy is still strong, driven in particular by a strong job market. Fewer workers applied for unemployment benefits last week than a week ago, a report showed on Thursday. But other signs of trouble are emerging.
On Thursday, a report showed homebuilders broke ground on fewer homes in the past month. The rise in mortgage rates directly generated by the Fed’s moves is digging into the industry. A separate reading on manufacturing in the mid-Atlantic region also fell unexpectedly.
“Corporate earnings estimates have not yet changed to reflect some softer economic data and this could lead to a second phase of this revaluation,” Northey said.
Treasury yields at highest level since 2011
Treasury yields rose sharply on Thursday, with the 10-year yield falling to 3.23% from 3.39% late Wednesday. It had climbed up to 3.48% in the morning, which is close to its highest level since 2011.
Higher rates are hitting the hardest this year, having risen the most through easy, ultralow rates from earlier in the pandemic, which are now one of the most expensive and risky investments. This includes bitcoin and high-growth technology stocks.
Big tech stocks were the top losers in the market on Thursday, but the sharpest losses were on stocks whose profits depend more on the strength of the economy and whether customers can continue buying amid the highest inflation in decades.
Cruise operators Norwegian Cruise Line Holdings, Royal Caribbean Group and Carnival all lost more than 11%.
It’s all a sharp turnaround from a day earlier, when stocks rallied shortly after the Fed’s biggest rate hike since 1994. Analysts said investors should heed a comment from Fed Chair Jerome Powell, who said a mega-hike of three-quarter percentage points would not be normal.
Powell said Wednesday that the Fed is moving “rapidly” to bring rates closer to normal levels after last week’s surprising report that showed consumer inflation unexpectedly sharp last month dashed expectations. given that inflation may have already peaked.
The Fed is “no longer trying to induce a recession, let’s be clear about that,” Powell said. He called Wednesday’s big increase “front-end loading.”
“Despite their assurances, it is not clear to me that the Fed has the tools they say they use to drive prices down,” said Jason Brady, CEO of Thornberg Investment Management. He also said that even after its big increase on Wednesday, which was three times the normal amount, “the Fed is still behind.”
Read more: How high is the risk of another recession? Explained