Stocks fell sharply across the world on Friday amid concerns that an already slowing global economy could fall into a recession as central banks increase the pressure with additional interest rate hikes.
The Dow Jones Industrial Average fell 1.6% to close at its lowest level since late 2020. The S&P 500 fell 1.7%, close to its 2022 low hit in mid-June, while the Nasdaq fell 1.8%.
The sell-off capped another difficult week on Wall Street, leaving the major indexes with their fifth weekly loss in six weeks.
Energy prices closed sharply lower as traders worried about a possible recession. Treasury yields, which affect interest rates on mortgages and other types of loans, and which are kept at their highest levels for several years.
European shares fell more or less sharply after preliminary data indicated that business activity experienced its worst monthly contraction since the beginning of 2021. Adding to pressure is a new plan announced in London to cut taxes, sending UK yields higher as they may eventually rise the end. Forcing its central bank to raise interest rates more sharply.
The Federal Reserve and other central banks around the world aggressively raised interest rates this week in hopes of curtailing high inflation, with the promise of more significant increases ahead. Such moves place restraints on economies by design, in the hope that slowing purchases by households and firms will reduce inflationary pressures. But it also threatens to trigger a recession, if it rises too much or too quickly.
Combined with the disappointing data on European business activity on Friday, a separate report indicated that US activity was still shrinking, although not as badly as in previous months.
“Financial markets are now fully absorbing the Fed’s harsh message that there will be no backing from the inflation battle,” Douglas Porter, chief economist at BMO Capital Markets, wrote in a research report.
US crude oil prices fell 5.7% to their lowest levels since early this year on concerns that a weaker global economy will burn less fuel. Cryptocurrency prices have also fallen sharply because higher interest rates tend to weigh heavily on investments that appear to be the most expensive or risky.
Even gold has fallen in the global trend, as bonds that pay higher yields make non-interest-paying investments look less attractive. Meanwhile, the US dollar was moving sharply higher against other currencies. That could hurt earnings for US companies with a lot of offshore business, as well as put financial pressure on much of the developing world.
The S&P 500 fell 64.76 points to 3,693.23, the fourth consecutive decline. The Dow, which at one point fell more than 800 points, lost 486.27 points to close at 29590.41. The Nasdaq index fell 198.88 points to 10,867.93 points.
Small-cap stocks have fared worse. The Russell 2000 Index fell 42.72 points, or 2.5%, to close at 1679.59 points.
More than 85% of stocks in the S&P 500 closed in the red, with tech companies, retailers and banks among the biggest weights on the benchmark index.
The Federal Reserve on Wednesday raised the benchmark interest rate, which affects many consumer and business loans, to a range of 3% to 3.25%. It was almost zero at the start of the year. The Fed also issued forecasts that the benchmark interest rate could reach 4.4% by the end of the year, a full point higher than was projected in June.
Treasury yields soared to multi-year highs as interest rates rose. The yield on the two-year Treasury, which tends to follow expectations of Fed action, rose to 4.20% from 4.12% late Thursday. They are trading at their highest level since 2007. The yield on 10-year Treasuries, which influences mortgage rates, fell to 3.69% from 3.71%.
Goldman Sachs strategists say the majority of their clients now see a “hard landing” pushing the economy into a sharp decline as inevitable. The question for them is only the timing, size and length of a possible recession.
High interest rates hurt all kinds of investments, but stocks can hold steady as long as corporate profits are growing strongly. The problem is that many analysts have started lowering their forecasts for upcoming earnings due to higher rates and fears of a possible recession.
“Increasingly, market psychology has shifted from concerns about inflation to fears that corporate profits, at least, will decline as economic growth in demand slows,” said Quincy Crosby, chief global strategist at LPL Financial.
In the US, the labor market has remained remarkably strong, and many analysts believe the economy grew in the summer quarter after contracting in the first six months of the year. But encouraging signs are also that the Fed may have to raise interest rates to get the cooling needed to bring down inflation.
Some key areas of the economy are already weakening. Mortgage rates are at a 14-year high, causing existing home sales to drop 20% in the past year. But other areas that work best when rates are low are also painful.
Meanwhile, in Europe, an already fragile economy is dealing with the effects of the war on its eastern front in the wake of the Russian invasion of Ukraine. The European Central Bank is raising its key interest rate to combat inflation even with the expectation that the region’s economy will already sink into recession. And in Asia, the Chinese economy is facing strict measures aimed at curbing coronavirus infections that are also hurting businesses.
While Friday’s economic reports were discouraging, few on Wall Street saw it as enough to persuade the Fed and other central banks to soften their stance on raising interest rates. So they reinforced the fear that prices will continue to rise in the face of already slowing economies.
Economics writer Christopher Rogaber and business writer Joe MacDonald and Matt Ott contributed to this report.
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