US stocks closed sharply lower on Friday, with the Dow Jones Industrial Average ending at its lowest closing value since November 2020. All three major benchmarks suffered another week of losses as bond yields rose. in the wake of the Federal Reserve’s interest rate hike on Wednesday.
For the week, the Dow fell 4% while the S&P 500 slipped 4.6% and the Nasdaq fell 5.1%, according to Dow Jones Market Data. All three major indices fell for the second week in a row.
What drove the markets?
US stocks fell sharply on Friday as market volatility increased after the Federal Reserve delivered a third consecutive huge interest rate hike of three-quarters of a percentage point on Wednesday.
“Recession risks have increased and no one wants to be the last one out the door,” Russell Evans, CEO and chief investment officer of Avitas Wealth Management, said in a phone interview Friday. “The market is rushing to get ahead of what the market sees as inevitable.”
Investors are concerned that the prospect of a so-called soft landing for the US economy is dimming as the central bank maintains its aggressive pace of monetary policy tightening in an effort to combat high inflation. After announcing his latest big rate hike on Wednesday, Fed Chairman Jerome Powell again warned that his job is not done.
“People interpreted this week’s action and rhetoric as more aggressive,” Evans said.
The S&P 500 ended Friday up 0.7% from its 2022 closing low of 3,666.77 on June 16, while the Dow forged a new low this year by closing at its lowest closing value since on November 20, 2020, according to Dow Jones Market Data.
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Treasury yields have risen since the Fed’s policy rate decision was announced on Wednesday, putting pressure on the stock market.
The yield on the 10-year Treasury note TMUBMUSD10Y,
it fell one basis point on Friday to finish at 3.695%, after rising Thursday at its highest rate since February 2011 based on 3 pm ET levels, according to Dow Jones Market Data.
Meanwhile, the 2-year Treasury yield TMUBMUSD02Y,
it rose 8.8 basis points on Friday to 4.212%, its highest level since Oct. 12, 2007.
“The price action has been very, very chaotic this whole week, and it’s been driven primarily, in my opinion, by the bond market,” said Mike Antonelli, market strategist at Baird.
But it’s not just the Fed that’s spooking markets. A host of other global central banks have also raised interest rates this week. US equity traders are paying particular attention to the UK, where markets have been hit by the latest Bank of England hike.
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“We have new tax cuts in the UK, which could prompt even more rate hikes from the Bank of England,” Jeff Kleintop, chief global investment strategist at Charles Schwab, said in a phone interview on Friday.
“The UK tax cuts are likely to pump more money into the economy, which is likely to create more demand and further fuel inflation,” Kleintop said. That, in turn, may prompt the Bank of England to raise rates even higher at a time when investors are concerned that monetary policy tightening by central banks is raising the risks of a global recession. He said.
One of the biggest challenges facing markets right now is rising real rates, that is, Treasury yields minus the breakeven rate of inflation on inflation-protected bonds. Real rates have risen sharply in the past six weeks as investors reacted to factors including data showing surprisingly strong inflation in August.
“Because of the discount effect, higher real rates are lowering the equity risk premium, and that’s the big challenge for the market,” said Brad Conger, deputy chief investment officer at Hirtle, Callaghan & Co.
If there’s a silver lining for markets right now, it’s that stocks and bonds look a little oversold here, as a lot of bad news, including a terminal fed funds rate above 4.5%, has already broken. discounted, Conger said. “If there is any marginal good news … it could shoot us more,” he added.
On the economic data front, readings from the flash S&P Global US Purchasing Managers’ Indices for the manufacturing and services sectors helped push the Composite PMI to 49.3 in September, beating the FactSet consensus number.
It’s still a “soft read,” Kleintop said of Charles Schwab. “It would still suggest the risk of a slight contraction for third quarter GDP.”
The energy sector SP500.10,
was the hardest hit among the S&P 500 sectors in Friday’s decline, suffering a drop of around 6.75% as US oil prices fell below $80 a barrel, according to FactSet data. Discretionary consumption SP500.25,
stocks also suffered heavy damage, falling 2.3%.
Meanwhile, the market is “very likely to see a bearish bias” in the upcoming third-quarter earnings season after seeing resistance in the company’s earnings growth this year, according to Kleintop. “That may be a last bit of support for the market that could start to deteriorate,” he warned.
Avitas Wealth Management’s Evans says he has recently been looking for buying opportunities in the stock market carnage. “I’ve been adding some tech stocks, but very big established tech stocks,” he said.
Companies in focus
Costco wholesale corporation
shares fell 4.3% after delivering fourth-quarter results on Thursday night. The wholesale retailer said it is seeing higher freight and labor costs and reported operating margins slightly below consensus expectations.
Actions of Chevron Corporation. cvx,
fell 6.5% and boeing company
LICENSED IN LETTERS,
fell 5.4%, dragging the Dow as two of the worst performers in the index on Friday.
shares fell 3.4% after the company announced cost cuts and shipping rate increases a week after withdrawing its outlook, sending its shares tumbling and even hurting stocks overall.
—Steve Goldstein contributed to this report.