Stocks crash as nervousness lingers over Fed
NEW YORK – Stocks fell again on Wall Street on Friday, taking the S&P 500 to its worst weekly loss since February, as more steam comes out of banks and other stocks that soared earlier this year.
The S&P 500 lost 55.41 points, or 1.3%, to 4,166.45 in a widespread collapse. It was the worst day for the index in a month as unease grew over the Federal Reserve making plans to possibly offer less aid to markets.
The Dow Jones Industrial Average lost 533.37 points, or 1.6%, to 33,290.08, and the Nasdaq composite fell 130.97, or 0.9%, to 14,030.38.
Investors are still recalibrating their moves after the Fed signaled this week that it could raise short-term interest rates twice by the end of 2023, earlier than expected. The Fed has also started talks about slowing down its bond buying program, which helps keep 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 is 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 Bank of America 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, fell 3.5% last week. This is the worst since October. The Nasdaq composite, which has more high-growth tech stocks, fell a much more modest 0.3%.
However, all major US 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 only about 2% below its all-time high set Monday, and the Dow Jones is within 5% 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 2.4% on Friday. This is one of the biggest losses among the 11 sectors that make up the index.
When the spread is large, the industry can make big 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 1.43% 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 2.5%, and it was one of the heaviest weights in the S&P 500. Bank of America fell 2.6%.
The rapid recovery in the economy and some supply shortages have recently helped push prices up across the economy, from lumber and airline tickets to used cars.
The Fed has said it expects high inflation to be “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 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, has not returned to what it was,” Johnson said.
Among the few winners in the market on Friday was software maker Adobe. It rose 2.6% 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 17.2% after increasing its quarterly dividend and reporting stronger-than-expected results for the last quarter.