US stocks suffer another week of losses, Dow Jones ends at lowest since November 2020 as bond yields hammer stocks after Fed rate hike
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 to the following the Federal Reserve’s interest rate hike on Wednesday.
For the week, the Dow Jones fell 4% while the S&P 500 slipped 4.6% and the Nasdaq fell 5.1%, according to Dow Jones Market Data. The three main indexes fell for a second consecutive week.
What drove the markets
U.S. stocks fell sharply on Friday as market volatility rose on the heels of the Federal Reserve’s third straight three-quarters percentage point hike in interest rates on Wednesday.
“The risks of recession have increased and no one wants to be the last to sneak out the door,” Russell Evans, managing director and chief investment officer at Avitas Wealth Management, said in a phone interview on Friday. “The market is rushing to get ahead of what the market sees as inevitable.”
Investors fear the prospect of a so-called soft landing for the U.S. economy may diminish as the central bank maintains its aggressive pace of monetary policy tightening in an effort to tackle high inflation. After announcing its latest major rate hike on Wednesday, Fed Chairman Jerome Powell again warned that his job was not done.
“People interpreted the action and rhetoric this week as more hawkish,” Evans said.
The S&P 500 ended Friday up 0.7% from its 2022 closing low of 3666.77 on June 16, while the Dow Jones made a new low this year ending at its closing value the lowest since November 20, 2020, according to Dow Jones Market Data.
See: The Fed Will Tolerate A Recession, And 5 Other Things We Learned From Powell’s Press Conference
Treasury yields have jumped since the Fed’s key rate decision was announced on Wednesday, putting pressure on the stock market.
The yield of the 10-year Treasury note TMUBMUSD10Y,
plunged a basis point on Friday to end at 3.695%, after hitting its highest rate since February 2011 on Thursday based on 3 p.m. Eastern time levels, according to Dow Jones Market Data.
Meanwhile, the 2-year Treasury yield TMUBMUSD02Y,
climbed 8.8 basis points on Friday to 4.212%, its highest level since Oct. 12, 2007.
“Price action has been really, really chaotic all week, and it’s mostly driven, in my view, by the bond market,” said Mike Antonelli, market strategist at Baird.
But it’s not just the Fed that is spooking the markets. A host of other global central banks also raised interest rates this week. US equity traders are paying particular attention to the UK, where markets have been rocked by the latest Bank of England hike.
See: Bond yields soar, pound falls to 37-year low as UK unveils deficit-funded tax cuts that spark investor concern
“We have further tax cuts in the UK, which could lead to even more rate hikes from the Bank of England,” said Jeff Kleintop, chief global investment strategist at Charles Schwab, in a phone interview on Friday.
“Tax cuts in the UK are likely to pump more money into the economy, which is likely to create more demand and fuel inflation further,” Kleintop said. This in turn could prompt the Bank of England to raise rates even further at a time when investors fear tighter monetary policy by central banks will increase the risks of a global recession, he said. declared.
One of the biggest challenges facing the markets right now is rising real rates, that is, Treasury yields minus the equilibrium inflation rate of inflation-protected bonds. Real rates have risen sharply over the past six weeks as investors reacted to factors such as data showing surprisingly strong inflation in August.
“Because of the discounting effect, higher real rates reduce the risk premium in equities, 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 the markets at this point, it’s that stocks and bonds look a bit oversold here as plenty of bad news – including a federal funds terminal rate north of 4.5% — have already been integrated, Conger said. “If there is good marginal news…it could propel us higher,” he added.
On the economic data front, readings of the flash S&P Global US Purchasing Managers’ Indexes for the manufacturing and services sectors helped push the composite PMI to 49.3 in September, outperforming the FactSet consensus number.
It’s still “soft reading,” said Charles Schwab’s Kleintop. “That would still suggest the risk of a slight contraction in GDP in the third quarter.”
The energy sector SP500.10,
was the hardest hit among the S&P 500 sectors in Friday’s plunge, falling about 6.75% as U.S. oil prices fell below $80 a barrel, according to data from FactSet. Consumer Discretionary SP500.25,
Shares were also hit hard, falling 2.3%.
Meanwhile, the market is “very likely to see downward guidance” in the upcoming third-quarter earnings season after seeing resilience in corporate earnings growth this year, according to Kleintop. “This could be a final support for the market which could start to deteriorate,” he warned.
Evans of Avitas Wealth Management says he has been looking for buying opportunities in the stock market carnage recently. “I added a few tech stocks, but very large established tech stocks,” he said.
Companies in the spotlight
Costco wholesale company
shares fell 4.3% after reporting fourth quarter results on Thursday evening. The wholesale retailer said it was seeing rising transportation and labor costs and reported operating margins slightly below consensus expectations.
Shares of Chevron Corporation. CLC,
fell 6.5% and Boeing Co.
fell 5.4%, dropping the Dow as two of the index’s worst performers on Friday.
Shares fell 3.4% after the company announced cost cuts and shipping rate increases a week after it withdrew its outlook, which sent shares tumbling and even hurt stocks more broadly.
—Steve Goldstein contributed to this report.