Shares fell sharply across the globe on Friday on concerns that an already slowing global economy might fall into recession as central banks step up the pressure with further interest rate hikes.
The Dow Jones Industrial Average fell 1.6%, closing at its lowest level since late 2020. The S&P 500 fell 1.7%, close to the mid-June 2022 low, while the Nasdaq slipped. 1.8%.
The selling ended another tough week on Wall Street, leaving the major indices with their fifth weekly loss in six weeks.
Energy prices closed sharply lower as traders worry about a possible recession. Treasury yields, which affect rates on mortgages and other types of loans, remained at their multi-year highs.
European equities fell just as sharply or more after preliminary data suggested trading activity had its worst monthly contraction since the beginning of 2021. A new plan to cut taxes was announced in London to increase the pressure.which pushed UK yields up because it could eventually force its central bank to hike rates even more drastically.
The Federal Reserve and other central banks around the world it aggressively hiked interest rates this week in hopes of undercutting high inflation, with bigger hikes promised for the future. Such moves hold back economies by design, in the hope that slower purchases by households and businesses will deflate inflationary pressures. But they also threaten a recession if they rise too much or too quickly.
In addition to Friday’s disheartening data on European economic activity, a separate report suggests that U.S. activity is also still shrinking, albeit not as severely as in previous months.
“Financial markets are now fully absorbing the Fed’s harsh message that there will be no retreat from fighting inflation,” Douglas Porter, chief economist at BMO Capital Markets, wrote in a research report.
Crude oil prices in the US have fallen 5.7% to their lowest levels since the beginning of this year on fears that a weaker global economy will consume less fuel. Cryptocurrency prices have also dropped dramatically as higher interest rates tend to hit hardest on investments that appear to be the most expensive or riskiest.
Gold also fell during the global rout, as bonds that pay higher yields make investments that pay no interest less attractive. Meanwhile, the US dollar moved sharply higher against other currencies. This can hurt the profits of US companies with many overseas businesses, as well as put much of the developing world under financial pressure.
The S&P 500 fell 64.76 points to 3,693.23, its fourth consecutive decline. The Dow, which was over 800 points down at one point, lost 486.27 points to close at 29,590.41. The Nasdaq fell 198.88 points to 10,867.93.
Shares of smaller companies did even worse. The Russell 2000 fell 42.72 points, or 2.5%, to close at 1,679.59.
More than 85% of stocks in the S&P 500 closed in the red, with technology companies, retailers and banks among the highest weightings in the benchmark index.
The Federal Reserve raised its benchmark rate on Wednesday, which affects many consumer and business loans, in a range from 3% to 3.25%. It was practically zero at the beginning of the year. The Fed also released a forecast that its benchmark rate could be 4.4% by the end of the year, a point higher than expected in June.
Treasury yields rose to multi-year highs as interest rates rose. The 2-year Treasury yield, which tends to follow expectations for Federal Reserve action, rose to 4.20% from 4.12% at the end of Thursday. It is trading at its highest level since 2007. The 10-year Treasury yield, which affects mortgage rates, slipped to 3.69% from 3.71%.
Goldman Sachs strategists say that most of their clients now see a “hard landing” as inevitable that pushes the economy down drastically. The question for them is only about the timing, extent and duration of a potential recession.
Higher interest rates hurt all types of investments, but stocks could remain stable as long as corporate profits grow strongly. The problem is that many analysts are starting to cut their forecasts for upcoming earnings due to higher rates and concerns about a possible recession.
“Increasingly, market psychology has shifted from concerns about inflation to concerns that, at the very least, corporate profits will decline as economic growth slows demand,” said Quincy Krosby, chief global strategist at LPL Financial.
In the US, the job 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 also suggest that the Fed may need to raise rates further to achieve the cooling needed to bring down inflation.
Some key areas of the economy are already weakening. Mortgage rates hit a 14-year high, causing existing home sales to drop by 20% over the past year. But other areas that do better when rates are low are also suffering.
In Europe, meanwhile, the already fragile economy is facing the effects of the war on its eastern front following the Russian invasion of Ukraine. The European Central Bank is raising its key interest rate to fight inflation even as the region’s economy is already expected to plunge into a recession. And in Asia, the Chinese economy is grappling with still stringent measures aimed at limiting COVID infections that also harm businesses.
While Friday’s economic reports were daunting, few on Wall Street saw them as enough to get the Fed and other central banks to soften their stance on rate hikes. So they only reinforced fears that rates will continue to rise in the face of the already slowing economies.
Economics writer Christopher Rugaber and business writers Joe McDonald and Matt Ott contributed to this report.