Dow sinks to 2022 lows as recession fears roil global markets


American flags fly in front of the New York Stock Exchange, Friday in New York. Markets around the world sold off on growing signs that the global economy is weakening, as central banks ratcheted up the pressure with further hikes in interest rates. (Mary Altaffer, Associated Press)

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NEW YORK – Stocks fell sharply worldwide on Friday on concerns that the already-slowing global economy could slip into recession as central banks ratchet up pressure with further interest rate hikes.

The Dow Jones Industrial Average fell 1.6% to its lowest level since late 2020. The S&P 500 was down 1.7% near its 2022 low in mid-June, while the Nasdaq was down 1.8%.

The selloff capped another tough week on Wall Street, leaving the major indexes with their fifth weekly loss in six weeks.

Energy prices closed sharply lower as traders worried about a possible recession. Treasury yields, which affect mortgage and other lending rates, are held at multi-year highs.

European shares fell just as sharply or more after preliminary data suggested the worst monthly contraction in business activity since early 2021. Adding to the pressure was a new plan announced in London to cut taxes, which led to a rise in UK revenues. forcing the central bank to further increase interest rates.

The Federal Reserve and other central banks around the world raised interest rates aggressively this week in hopes of taming high inflation, with bigger hikes on the horizon. Such moves slow economies by design, with the hope that slower purchases by households and businesses will reduce inflationary pressures. But if they rise too far or too quickly, they threaten recession.

In addition to encouraging data on European business activity on Friday, a separate report suggested that US activity was still slowing, although not as bad as in previous months.

“Financial markets are now fully absorbing the Fed’s tough message that it will not back down from its fight against inflation,” Douglas Porter, chief economist at BMO Capital Markets, wrote in a research note.

U.S. crude oil prices fell 5.7% to their lowest level since the beginning of this year on concerns that a weak global economy will burn less fuel. Cryptocurrency prices have also fallen sharply, as high interest rates hit the most expensive or seemingly riskiest investments the most.

Even gold has fallen globally as higher-yielding bonds make interest-free investments less attractive. Meanwhile, the US dollar is rising sharply against other currencies. This could hurt the profits of US companies with many overseas businesses, as well as put financial strain on much of the developing world.

The S&P 500 dropped 64.76 points to 3,693.23, its fourth straight decline. The Dow, which was down more than 800 points at one point, lost 486.27 points to close at 29,590.41. The Nasdaq fell 198.88 points to 10,867.93.

Small-cap stocks fared even worse. The Russell 2000 index 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 biggest weights in the benchmark index.

On Wednesday, the Federal Reserve raised its benchmark rate, which affects many consumer and business loans, from 3% to 3.25%. At the beginning of the year, it was almost zero. The Fed also released a forecast that suggested the benchmark rate could be 4.4% by the end of the year, a full point higher than it predicted in June.

Treasury yields rose to multi-year highs as interest rates rose. The 2-year Treasury yield, which tends to follow expectations of Federal Reserve action, rose to 4.20% from 4.12% on Thursday. It is trading at its highest level since 2007. The yield on the 10-year Treasury, which affects mortgage rates, fell to 3.69% from 3.71%.

Goldman Sachs strategists say most of their clients now see the imminent “hard landing” that has brought the economy down sharply. For them, the question is the timing, extent and length of a potential recession.

Higher interest rates hurt all types of investments, but stocks may hold steady as corporate earnings grow strongly. The problem is that many analysts are starting to lower their forecasts for future earnings due to concerns about higher rates and a possible recession.

“Market psychology has increasingly shifted from concerns about inflation to concerns that at least corporate profits will decline as economic growth slows demand,” said Quincy Krosby, chief global strategist at LPL Financial.

Walking down the alley next to the New York Stock Exchange in New York.  Stocks fell globally on more signs of a weakening global economy, as central banks ratcheted up the pressure with further interest rate hikes.
Walking down the alley next to the New York Stock Exchange in New York. Stocks fell globally on more signs of a weakening global economy, as central banks ratcheted up the pressure with further interest rate hikes. (Photo: Mary Altaffer, Associated Press)

The U.S. job market remained remarkably robust, and many analysts expect the economy to grow in the summer quarter after slowing in the first six months of the year. But encouraging signs suggest the Fed may need to raise rates further to achieve the cooling needed to lower inflation.

Some key sectors of the economy are already weakening. Mortgage rates have hit a 14-year high, causing existing home sales to drop 20% in the past year. But other areas that do best when rates are low also suffer.

And in Europe, the already fragile economy is dealing with the effects of the war on the eastern front after Russia’s intervention in Ukraine. With the region’s economy already expected to be in recession, the European Central Bank is raising its key interest rate to fight inflation. In Asia, China’s economy is still struggling with tough measures to limit COVID infections, which are also hurting business.

Although Friday’s economic reports were encouraging, few on Wall Street saw them as enough to convince the Fed and other central banks to ease their stance on rate hikes. As such, they simply fueled fears that rates would continue to rise in the face of already slowing economies.

Contribution: Christopher Rugaber, Joe McDonald and Matt Ott

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