Shares were largely down on Friday after a Federal Reserve official said the country’s central bank may need to raise interest rates as early as next year, earlier than the Fed’s latest estimate a possible rate hike in 2023.
NEW YORK (AP) – Stocks crash on Wall Street on Friday, and the S&P 500 is on track for its losing first week in four, as more steam comes out of banks and other stocks that have soared in boomed earlier this year with expectations for the economy and inflation.
The S&P 500 was down 0.9% in afternoon trading and losses were widespread. More than four out of five stocks on the index were down, and it is on the verge of having its worst day in a month.
The Dow Jones Industrial Average was down 406 points, or 1.2%, at 33,416 at 2:10 p.m. EST, and the Nasdaq composite was down 0.6%.
Investors are still recalibrating their moves following the Federal Reserve’s signal this week that it may hike interest rates sooner than expected. Policymakers have indicated they could hike short-term rates twice by the end of 2023, and they have also started discussing the slowdown in the bond buying program that is keeping long-term rates low. St. Louis Federal Reserve Chairman James Bullard told CNBC on Friday that his personal prediction was that the first rate hike could come as early as next year.
It’s recognition that a recovering economy with near record high prices for homes and stocks may not need very low rates for much longer. A recent surge in inflation could also increase the pressure. But any pullback in Fed support would be a big change for markets, which have been feasting on ultra-low rates for over a year. It marked a “U-turn on Easy Street,” as strategists at BofA Global Research described it.
This hurt the stocks of banks, oil producers and other companies whose earnings are closely tied to the strength of the economy in particular. On the other hand, stocks of companies capable of growing almost independently of the fortunes of the economy held up better.
The Dow Jones Industrial Average, which is full of companies whose profits move more with the economy, is expected to fall 3.1% this week. It would be his worst since the end of January. The Nasdaq composite, which has more high-growth tech stocks, was virtually unchanged for the week.
Of course, all of the major U.S. stock indexes remain relatively close to their all-time highs as the economy continues to emerge from the recession caused by the pandemic. The S&P 500 is less than 2% below its all-time high set Monday, and the Dow Jones is within 4% of its record set last month.
A measure of stock market nervousness, known as the VIX, rose on Friday, but only returned to its level about a month ago.
Banks are suffering as the spread between short and long-term interest rates narrows, which helped push S&P 500 financial stocks down 2.2% on Friday. This is the largest loss among the 11 sectors that make up the index.
When the spread is large, the industry can make large profits by borrowing liquidity from short-term markets and lending it at long-term rates. But short-term yields have jumped sharply this week after the Fed hinted it could bring forward the timing of rate hikes. The two-year Treasury yield fell to 0.25% on Friday, from 0.23% the day before and 0.16% the week before.
The 10-year Treasury yield, which is less directly affected by the Fed’s movements, ended the week near its starting point, although there were some irregular upward and downward movements in the ‘interval. It stood at 1.44% on Friday afternoon, down from 1.51% on Thursday night, but not far from its level of 1.46% a week earlier.
Pressure on rates helped push JPMorgan Chase down 2.6%, and it was one of the heaviest weights in the S&P 500. Bank of America fell 2.8%.
The rapid recovery in the economy and some supply shortages have recently helped push prices up across the economy, from lumber to airline tickets to used cars. The Fed has said it expects high inflation to be only “transient” and that lumber prices at least have already started to moderate a bit. Much of Wall Street also claims that inflation appears to be only temporary, but part of the Fed’s mission is to keep prices under control.
“You just don’t have the companies that can build the capacity to meet the demand,” said Ken Johnson, investment strategy analyst at the Wells Fargo Investment Institute. “Investors are nervous about this.”
The first step the Fed is likely to take would be a slowdown in its $ 120 billion monthly bond purchases, which help keep mortgages low, but the Fed chairman said such reduction was probably still “a long way off”.
Besides keeping inflation stable, the Fed’s other main job is to keep the job market healthy. Employment has improved, but growth has slowed in recent months.
“It reassures investors that the Fed will not change rates when the economy, from a labor market perspective, is not back to where it was,” Johnson said.
Among the few winners in the market on Friday was software maker Adobe. It rose 1.9% after posting stronger results for the last quarter than analysts had expected and gave encouraging guidance for the current quarter.
Arms maker Smith & Wesson jumped 16.9% after raising its quarterly dividend and reporting stronger-than-expected results for the last quarter.
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