Stocks fell sharply around the world on Friday on fears the already slowing global economy could slip into recession as central banks ramped up pressure with additional rate hikes.
The selling capped another tough week on Wall Street, sending the major indexes down for the fifth week in six weeks.
Energy prices closed sharply lower as traders worried about a possible recession. Treasury yields, which affect interest rates on mortgages and other types of loans, held at their highest levels in years.
European stocks fell sharply or more after preliminary data showed business activity posted its worst monthly decline since early 2021. Adding to the pressure was a new scheme announced in London to cut taxesthis has sent UK yields soaring as it could eventually force its central bank to hike rates even further.
The Federal Reserve and other central banks around the world raised interest rates aggressively this week in hopes of easing high inflation, with more big hikes promised in the future. Such moves will brake economies by design, in the hope that slower household and business purchases will ease inflationary pressures. But they also threaten a recession, if they rise too far or too quickly.
In addition to Friday’s disappointing European business data, a separate report showed that US activity was also shrinking, though not as badly as in previous months.
Douglas Porter, chief economist at BMO Capital Markets, wrote in a research note: “Financial markets are now fully receptive to the Fed’s harsh message that there is no retreat from the inflation war.
U.S. crude oil prices fell 5.7% to their lowest levels since the start of this year on concerns that a weaker global economy will burn less fuel. Cryptocurrency prices also plummeted as higher interest rates tend to hit the investments that seem the most expensive or riskiest.
Even gold has fallen in the worldwide trend, as higher-yielding bonds make zero-interest investments look less attractive. Meanwhile, the US dollar is strengthening against other currencies. That could hurt the profits of US companies that do a lot of business abroad, as well as put financial pressure 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 fell more than 800 points, lost 486.27 points to close at 29,590.41. Nasdaq fell 198.88 points to 10,867.93.
Shares of smaller companies are even worse. The Russell 2000 dropped 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 biggest weights on the benchmark index.
The Federal Reserve on Wednesday raised its benchmark interest rate, which affects many consumer and business loans, to a range of 3% to 3.25%. It was almost zero at the beginning of the year. The Fed also released a forecast suggesting its benchmark interest rate could be 4.4% by the end of the year, one point higher than expected in June.
Treasury yields rose to multi-year highs as interest rates rose. Yields on 2-year Treasuries, which tend to follow expectations for Federal Reserve action, rose to 4.20% from 4.12% late Thursday. It is trading at its highest level since 2007. The yield on 10-year Treasuries, which affects mortgage rates, has fallen from 3.71% to 3.69%.
Goldman Sachs Strategists say most of their clients now see a “hard landing” that drags the economy down sharply. The question for them is only about the duration, magnitude and length of a potential recession.
Higher interest rates hurt all types of investments, but stocks can stay stable as long as corporate profits grow strongly. The problem is that many analysts are starting to cut their forecasts for upcoming earnings because of higher rates and worries about a possible recession.
“Market sentiment has increasingly shifted from concern about inflation to worry that, at a minimum, corporate profits will decline as business growth grows,” said Quincy Krosby, chief global strategist at LPL Financial. economy slows demand”.
In the US, the job market has remained remarkably stable and many analysts see the economy growing in the summer quarter after contracting in the first six months of the year. But encouraging signs also suggest that the Fed may have to raise rates even higher to get the cooling needed to bring down inflation.
Several key sectors of the economy are weakening. Mortgage rates have hit a 14-year high, sending existing home sales down 20% over the past year. But other areas that perform best when rates are low are also taking a hit.
Meanwhile, in Europe, the already fragile economy is dealing with the effects of war on the eastern front following Russia’s invasion of Ukraine. The European Central Bank is raising its key interest rate to fight inflation even as the region’s economy is forecast to slip into recession. And in Asia, the Chinese economy is facing still stringent measures to limit the spread of COVID that also hurt businesses.
While Friday’s economic reports were disheartening, a handful on Wall Street viewed them as enough to convince the Fed and other central banks to soften their stance on rate hikes. So they only reinforce fears that rates will continue to rise in the face of already slowing economies.
Economics writer Christopher Rugaber and Business Writers Joe McDonald and Matt Ott contributed to this report.
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