The Dow and S&P 500 slide more than 3% as investors reassess Fed comments

The stock market made its biggest turnaround since the early days of the pandemic on Thursday, with the Dow Jones Industrial Average posting its biggest drop this year just 24 hours after its biggest rise since 2020.

The reversal dashed the euphoria that reigned on Wall Street on Wednesday following Federal Reserve Chairman Jerome Powell’s comment that the Fed was not “actively” considering raising interest rates by 0, 75 percentage points at a future meeting. With inflation at its highest level since the early 1980s, markets were anticipating such a rise and the prospect of a slower rate hike sparked a furious buying spree late in the afternoon.

The optimism behind that rally was long gone on Thursday, when selling was broad-based, albeit more intense in tech stocks that have fallen on hard times in 2022 after years of leading the market’s advance.

Tesla fell 8.3% and Amazon.com fell 7.6%. Bank stocks, a key indicator of economic expectations, fell 2.7%, according to the KBW Nasdaq index of large commercial lenders. The Russell 2000 Index of US Small Companies fell 4.6%.

“The market yesterday was a relief rally,” said Seema Shah, chief strategist at Principal Global Investors. On Thursday, she said, the realities of a tougher environment for equities were starting to set in, including higher rates, tough earnings comparisons and a stronger U.S. dollar weighing on earnings going forward. foreign multinational companies.

Thursday’s rout is the latest example of the volatility that has characterized markets this year and highlights unease over the likely impact of the Fed’s rate hike campaign, which aims to reverse years of accommodative policy. .

This unease amplifies the tendency of many investors to sell certain stocks during market rallies, in an effort to rebalance portfolios that may have become too concentrated in stocks of companies that have benefited from the pandemic-era stimulus.

The Nasdaq Composite Index fell 5%, the S&P fell 3.6% and the Dow Jones slid 3.1%, or 1,063 points, erasing Wednesday’s gains. Major indexes hovered between 7.0 and 9.4 percentage points between Wednesday’s highs and Thursday’s lows, according to Dow Jones Market Data, their biggest swings since the first half of 2020.

In the bond market, the yield on the benchmark 10-year Treasury note rose to 3.066% from 2.914% on Wednesday. Bond prices fall when yields rise.

The pullback came a day after major U.S. stock indexes soared, with the Dow Jones surging more than 900 points, its biggest one-day gain since 2020. On Wednesday, central bank officials approved an increase in interest rate by half a percentage point, raising the federal government. – fund rates within a target range of between 0.75% and 1%.

Federal Reserve Chairman Jerome Powell said on Wednesday the central bank had approved a half-percentage-point hike in interest rates in a bid to curb inflation that is at an all-time high for four decades. Photo: Win McNamee/Getty Images

“The Fed is reducing liquidity in the markets and that is increasing volatility, and so this could be our new normal here for a while until the Fed gets inflation under control and changes policy,” said John Ingram, chief executive. Investments and Partner at Crestwood Advisors.

Even with a bigger increase in interest rates over the next few months, investors still face the most aggressive tightening of US monetary policy since 2000 – the last time the central bank raised rates by half -point. Although many investors argue that the market set-up was radically different then than it is today – with valuations then higher and many top-performing dot-com companies lacking long-term business prospects – they are not not lost on them that this year ended with sharp declines for the main indices.

Many investors are now wondering how much the Fed might raise rates over the next two years amid soaring inflation and how that might affect the economy and corporate earnings.

“It’s like when we all take drugs, they have to build up in your system and those fed funds increases always have a lag,” said Tim Horan, co-director of fixed income investments at Chilton Trust.

On Thursday, these jitters were seen across the market. Growth stocks were particularly hard hit. Chipmakers Advanced Micro Devices,

Nvidia and NXP Semiconductors were all down at least 4%. Megacap’s technology shares also fell, with Meta Platforms down 6.8%, Netflix down 7.7% and Apple down 5.6%.

Higher interest rates can diminish the appeal of tech stocks by reducing the value investors place on their future earnings. Higher yields in general also increase the appeal of fixed income products over riskier assets such as equities.

Some of the stocks that were the darlings of the pandemic also lost ground. Etsy fell 17% after the online market posted a lower-than-expected forecast for the current quarter. eBay lost 12% after slashing its forecast for the impacts of the war in Ukraine.

Shares of Wayfair also fell, losing 26%, after the online homewares retailer posted a bigger-than-expected quarterly loss. Shopifyit is

First-quarter earnings beat analysts’ expectations, sending the stock down 15%.

“We struggle to see who is going to be a massive equity buyer in the next two weeks,” said Viraj Patel, global macro strategist at Vanda Research. “It’s a waiting game for this catalyst…You need more conviction from the data, either to show that inflation has peaked or that the economy is slowing down and the Fed is n won’t need to be so aggressive.”

Bucking the trend, Twitter shares jumped 2.7% to $50.37 after Tesla CEO Elon Musk said he received letters from investors committing more than $7 billion. funding fee to raise the equity portion of its offer to buy the social media company. Last month, Twitter agreed to a deal with Mr. Musk to take the company private for $54.20 a share.

Booking Holdings jumped 3.3% after its revenue beat expectations and it said it saw strengthening global travel trends in the current quarter.

Traders worked on the floor of the New York Stock Exchange on Wednesday.


Photo:

Justin Lane/Shutterstock

Assets that investors perceive as safer were among those that rallied on Thursday as fund managers sought safe havens as stocks and bonds fell in tandem. Even after Wednesday’s rally, some strategists and investors said they were uncertain about the outlook for the stock market in the weeks and months ahead.

“If they try to do too much and the market takes off, then they have [Fed] kind of shot themselves in the foot because it’s going to be hard to make future rate hikes,” said Jordan Kahn, chief investment officer at ACM Funds. “That’s the fine line the Fed is trying to walk – do the same [rate increases] because they think the market can digest it without upsetting it too much.

Mr. Kahn says his company is holding higher than usual cash balances. Within the stock market, he is bullish on the energy and materials sectors, predicting that they will continue to benefit from supply and demand imbalances.

In oil markets, Brent, the international oil benchmark, rose 0.7% to $110.90 a barrel. Brent crude posted its biggest one-day gain in more than three weeks on Wednesday after the European Union proposed a ban on imports of Russian crude within six months and the country’s refined petroleum products by the end of the year. The Organization of the Petroleum Exporting Countries and its allies, collectively called OPEC+, met on Thursday to discuss production targets.

The WSJ Dollar Index, which measures the US currency against a basket of 16 others, rose 1.4%. On Wednesday, the index fell 0.9%, its biggest drop since November 2020. The dollar’s status as the world’s reserve currency makes it a particularly attractive haven for investors.

Prices for gold, another favorite haven, also climbed, rising $7.00 per troy ounce, or 0.4%, to $1,874 per troy ounce.

The pound fell 2% against the dollar to $1.2378 after the Bank of England raised interest rates, but signaled that it should act cautiously in the coming months as the concerns are growing over a fall into recession.

Overseas, the pancontinental Stoxx Europe 600 index fell 0.7%. Banks, technology stocks and transportation companies are among those that have rallied. Italian bank UniCredit climbed 4% after its earnings beat analysts’ expectations. Airbus jumped 6.6% after the maker announced an increase in net profit and decided to increase production of its best-selling A320 single-aisle jetliner.

Shell gained 3% after first-quarter profit growth, boosted by soaring commodity prices.

In Asia, the Hong Kong Hang Seng fell 0.4% and the Shanghai Composite rose 0.7%. Markets in Japan were closed for a holiday.

Write to Caitlin McCabe at [email protected]sj.com and Hardika Singh at [email protected]

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