Even gold fell in the worldwide rout, as bonds paying higher yields make investments that pay no interest look less attractive. Meanwhile the US dollar has been moving sharply higher against other currencies. That can hurt profits for US companies with lots of overseas business, as well as put a financial squeeze on much of the developing world.
The S&P 500 fell 64.76 points to 3,693.23, its fourth straight drop. The Dow, which at one point was down more than 800 points, lost 486.27 points to close at 29,590.41. The Nasdaq fell 198.88 points to 10,867.93.
Smaller company stocks did even worse. The Russell 2000 fell 42.72 points, or 2.5 per cent, to close at 1,679.59.
More than 85 per cent of stocks in the S&P 500 closed in the red, with technology companies, retailers and banks among the biggest weights on the benchmark index.
The Federal Reserve on Wednesday lifted its benchmark rate, which affects many consumer and business loans, to a range of 3 per cent to 3.25 per cent. It was at virtually zero at the start of the year. The Fed also released a forecast suggesting its benchmark rate could be 4.4 per cent by the year’s end, a full point higher than envisioned in June.
Treasury yields have climbed to multiyear highs as interest rates rise. The yield on the 2-year Treasury, which tends to follow expectations for Federal Reserve action, rose to 4.20 per cent from 4.12 per cent late Thursday. It is trading at its highest level since 2007. The yield on the 10-year Treasury, which influences mortgage rates, slipped to 3.69 per cent from 3.71 per cent.
Goldman Sachs strategists say a majority of their clients now see a “hard landing” that pulls the economy sharply lower as inevitable. The question for them is just on the timing, magnitude and length of a potential recession.
Higher interest rates hurt all kinds of investments, but stocks could stay steady as long as corporate profits grow strongly. The problem is that many analysts are beginning to cut their forecasts for upcoming earnings because of higher rates and worries about a possible recession.
“Increasingly, market psychology has transitioned from concerns over inflation to worries that, at a minimum, corporate profits will decline as economic growth slows demand,” said Quincy Krosby, chief global strategist for LPL Financial.
In the US, the jobs market has remained remarkably solid, and many analysts think the economy grew in the summer quarter after shrinking in the first six months of the year. But the encouraging signs also suggest the Fed may have to jack rates even higher to get the cooling needed to bring down inflation.
Some key areas of the economy are already weakening. Mortgage rates have reached 14-year highs, causing sales of existing homes to drop 20 per cent in the past year. But other areas that do best when rates are low are also hurting.
In Europe, meanwhile, the already fragile economy is dealing with the effects of war on its eastern front following Russia’s invasion of Ukraine. The European Central Bank is hiking its key interest rate to combat inflation even as the region’s economy is already expected to plunge into a recession. And in Asia, China’s economy is contending with still-strict measures meant to limit COVID infections that also hurt businesses.
While Friday’s economic reports were discouraging, few on Wall Street saw them as enough to convince the Fed and other central banks to soften their stance on raising rates. So they just reinforced the fear that rates will keep rising in the face of already slowing economies.
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