NEW YORK (AP) — A sell-off left the Dow Jones Industrial Average more than 1,000 points lower on Thursday, wiping out gains from Wall Street’s biggest rally in two years, as concerns grow over interest rates higher that the Federal Reserve uses in its fight against inflation will derail the economy.
The benchmark S&P 500 index fell 3.6%, marking its biggest loss in nearly two years, a day after posting its biggest gain since May 2020. The Nasdaq fell 5%, its worst drop since June 2020. The losses of the Dow Jones and other indices offset the gains of the previous day.
“Yesterday’s strong rally was not rooted in reality and today’s dramatic selloff is a reversal of that misplaced exuberance,” said Ben Kirby, co-chief investment officer at Thornburg Investment Management.
The frantic daily reversal on Wall Street reflects the degree of uncertainty and unease among investors about the range of threats facing the economy, starting with inflation at the highest level in four decades, and the efficiency of the Federal Reserve’s attempt to tame rising prices by raising interest rates will.
On Wednesday, the Federal Reserve announced a widely expected half-percentage-point hike in its short-term interest rate. Shares rebounded from the move but then rose sharply as bond yields fell after Fed Chairman Jerome Powell reassured investors that the central bank was not considering a move to hikes rate hikes by three-quarters of a point as the Fed continues with further rate hikes in the months ahead.
But whatever relief Powell’s remarks brought to stock market investors disappeared on Thursday. Stocks fell and bond yields rose. The yield on the 10-year Treasury note rose to 3.04%. Rising yields will certainly put upward pressure on mortgage rates, which are already at their highest level since 2009.
Investors remain worried about whether the Fed can do enough to rein in inflation without tipping the economy, which is already showing signs of slowing, into a recession. In addition to high inflation and rising interest rates, investors are grappling with uncertainty regarding ongoing supply chain disruptions and geopolitical tensions.
“The biggest problem is that there are only so many moving parts and the unanswered question is to what extent the Fed’s attempts to control inflation will lead to an economic slowdown and possibly a recession” said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management.
The S&P 500 fell 153.30 points to 4,146.87, while the Nasdaq slipped 647.16 points to 12,317.69. The Dow briefly slipped 1,375 points before closing 1,063.09 points, or 3.1%, at 32,997.97.
Shares of smaller companies also fell sharply. The Russell 2000 fell 78.77 points, or 4%, to 1,871.15.
The Fed’s aggressive move to raise interest rates has investors wondering if it can pull off the delicate dance to slow the economy enough to halt high inflation, but not so much as to cause a downturn.
On Wednesday, Powell said there was a “good chance” the economy would experience a “soft or soft landing or outcome” as the central bank raises rates.
But Wall Street is not necessarily convinced.
“Concerns center on whether the Fed will have to get even more hawkish to depress demand — and that would mean slowing the economy more than they currently expect,” said Quincy Krosby, chief strategist. shares for LPL Financial. “And today’s market action questions whether ‘soft-ish’ is plausible.”
The Fed’s latest decision to raise interest rates by half a percentage point was widely expected. Markets stabilized this week ahead of the policy update, but Wall Street feared the Fed might decide to raise rates by three-quarters of a percentage point at its next meeting. Powell allayed those concerns, saying the central bank is “not actively considering” such an increase.
The central bank also announced that it would start trimming its massive $9 trillion balance sheet, made up mostly of Treasury bonds and mortgage bonds, starting June 1. These large holdings are a policy tool the Fed uses to keep long-term interest rates, such as those on mortgages, low.
When Powell said the Fed was not considering a gigantic hike in short-term rates, it sent a signal to investors to send stock prices skyrocketing and bond yields plummeting. A slower pace of rising interest rates would mean less risk of the economy tipping into recession, as well as less downward pressure on the prices of all kinds of investments.
But diminishing the odds of a three-quarter point hike doesn’t mean the Fed is done raising rates steadily and sharply as it struggles to get inflation under control, not even close. BNP Paribas economists still expect the Fed to keep raising the fed funds rate until it hits a range of 3% to 3.25%, from zero to 0.25% earlier This year.
“We don’t believe this is President Powell’s intention,” BNP Paribas economists wrote in a report, citing market jubilation on Wednesday, “and we believe we could see the Fedspeak coming to seek tightening. financial terms”.
The Bank of England raised its benchmark interest rate to the highest level in 13 years on Thursday, its fourth rate hike since December as UK inflation hit 30-year highs.
Energy markets remain volatile as the conflict in Ukraine continues and demand remains high amid oil shortages. European governments are trying to replace energy supplies from Russia and are considering an embargo. OPEC and allied oil producing countries decided on Thursday to gradually increase the flow of crude they send around the world.
Rising oil and gas prices have contributed to uncertainty hanging over investors as they try to gauge the impact of inflation on businesses, consumer activity and overall economic growth.
Homebuilders fell overall on Thursday as average long-term home loan rates rose. DR Horton slipped 5.8%.
The average rate for a 30-year fixed-rate mortgage hit 5.27% this week, its highest level since 2009, according to mortgage buyer Freddie Mac. A year ago, it averaged 2.96%. Mortgage rates tend to follow movements in the 10-year Treasury yield. The sharp rise in mortgage rates has put a strain on the affordability of buyers after years of sharply rising prices.
AP Business Writer Stan Choe contributed. Veiga reported from Los Angeles.