US stocks fell sharply on Friday, with the Dow Jones Industrial Average ending at its lowest close since November 2020. All three major indexes suffered another week of losses as bond yields rose on Wednesday amid a Federal Reserve rate hike.
According to Dow Jones Market Data, the Dow fell 4%, the S&P 500 fell 4.6%, and the Nasdaq fell 5.1% for the week. All three major indices fell for the second week in a row.
What drove the markets
U.S. stocks fell sharply on Friday as market volatility spiked after the Federal Reserve on Wednesday secured a third straight, jumbo interest rate hike of three quarters of a percentage point.
“Recession risks have increased, and nobody wants to be the last one in the door,” Russell Evans, CEO and chief investment officer of Avitas Wealth Management, said in a phone interview Friday. “The market rushes to anticipate what the market inevitably sees.”
Investors worry that the prospect of a so-called soft landing for the U.S. economy is fading as the central bank continues its aggressive pace of tightening monetary policy to combat high inflation. After announcing his latest big rate hike on Wednesday, Fed Chairman Jerome Powell warned again that his work is not done.
“People interpreted the action and rhetoric this week as more hawkish,” Evans said.
The S&P 500 finished up 0.7% on Friday from a 2022 low of 3,666.77 on June 16, while the Dow ended at its lowest close since Nov. 20, 2020, making a new trough this year, according to Dow Jones Market Data. .
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Treasury yields rose after the Fed announced its policy rate decision on Tuesday, putting pressure on the stock market.
The yield on the 10-year Treasury Note TMUBMUSD10Y,
After hitting its highest level since February 2011 at 3 p.m. ET on Thursday, it ended Thursday down a basis point at 3,695%, according to Dow Jones Market Data.
Meanwhile, the 2-year Treasury yield TMUBMUSD02Y,
It rose 8.8 basis points to 4,212% on Friday, the highest level since October 12, 2007.
“Price action has been really, really chaotic all week, and it’s been largely driven by the bond market in my opinion,” said Mike Antonelli, market strategist at Baird.
But it’s not just the Fed that’s spooking the markets. Several other global central banks also raised interest rates this week. US equity traders are paying particular attention to the UK, where markets have been rattled by the Bank of England’s latest hike.
To see: Bond yields jumped, sending the pound to a 37-year low as Britain announced deficit-financed tax cuts that worried investors.
“We have new tax cuts in the U.K., which could lead to further rate hikes by the Bank of England,” Jeff Kleintop, chief global investment strategist at Charles Schwab, said in a phone interview Friday.
“UK tax cuts are likely to inject more money into the economy, which will create more demand and boost inflation,” Kleintop said. That, he said, could prompt the Bank of England to raise interest rates further at a time when investors worry that tightening central banks are raising the risks of a global recession.
One of the biggest challenges facing markets right now is rising real interest rates — meaning the Treasury is pulling out a breakeven inflation rate from inflation-protected bonds. Real exchange rates have risen sharply over the past six weeks as investors reacted to factors including data showing surprisingly strong inflation in August.
“Higher real rates reduce the equity risk premium because of the discount effect, which is a big challenge for the market,” said Brad Conger, deputy chief investment officer at Hirtle, Callaghan & Co.
If there’s a silver lining for the markets at this point, it’s that stocks and bonds are a bit oversold here because a lot of bad news — including a terminal fed funds rate north of 4.5% — has already been priced in, Conger said. “If there’s any good news … it can push us even higher,” he said.
On the economic data front, flash S&P Global US purchasing managers’ index readings for both the manufacturing and services sectors helped lift the September composite PMI to 49.3, beating the FactSet consensus figure.
Charles Schwab’s Kleintop is still a “soft read.” “This would still suggest a modest downside risk to third-quarter GDP.”
Energy sector SP500.10,
As U.S. oil prices fell below $80 a barrel, the S&P 500 was the hardest hit among sectors during Friday’s decline, falling about 6.75%, according to FactSet data. Consumer discretionary SP500.25,
stocks also fared worse, falling 2.3%.
Meanwhile, according to Kleintop, the market is “highly likely to see downward guidance” in the coming earnings season for the third quarter, after seeing stagnation in company earnings growth this year. “This could be the last support for a market that could start to deteriorate,” he warned.
Avitas Wealth Management’s Evans says he has been looking for buying opportunities in the recent stock market carnage. “I added some technology stocks, but very large established technology stocks,” he said.
Companies in focus
Costco Wholesale Corp.
Shares fell 4.3% after reporting Q4 results on Thursday. The wholesaler reported seeing higher freight and labor costs and operating margins slightly below consensus expectations.
stocks Chevron Corp. CVX,
It lost 6.5% and Boeing Co.
It fell 5.4% on Friday, dragging down the Dow, the two worst performers in the index.
Shares fell 3.4% a week after the company withdrew its forecast and announced cost cuts and freight rate hikes, sending shares lower and even hurting stocks more broadly.
-Steve Goldstein contributed to this report.