Wall Street falls to first down week in four on rate worries
NEW YORK — Wall Street closed its first losing week in the last four with an up-and-down Friday, as investors brace for the Federal Reserve to tighten the brakes on the economy more aggressively to beat down inflation.
Big tech stocks once again led the market lower, and the S&P 500 fell 11. 93 points, or 0.3%, to 4,488. 28 after wobbling much of the day. The Dow Jones Industrial Average rose 137. 55, or 0.4%, to 34,721.12. The weakness for tech stocks, meanwhile, dragged the Nasdaq composite down 186. 30, or 1.3%, to 13,711.00.
For the week, the S&P 500 lost 1.3%. Stocks have fallen as the Federal Reserve moves more aggressively to combat inflation by raising short-term rates and making other moves. This is a drastic change from the Fed keeping rates at record lows to stimulate economy and help it through the pandemic.
Investors learned this week that the Fed may hike short-term rates by double the usual amount at several upcoming meetings, and that it came close to doing so last month. The last time that happened was in 2000. The Fed also indicated in the minutes from its last meeting that it’s likely to shrink its massive stockpile of bonds by up to $95 billion monthly, starting as soon as next month.
Altogether, the moves should make it more expensive for U.S. households and businesses to borrow, which in turn would slow the economy and hopefully halt the hottest inflation in 40 years.
Higher rates hurt all types of investments, especially the most expensive stocks. Higher rates can lead to lower returns on investments, especially stocks that are considered the most risky. Investors will be less willing to pay more for safer bonds. This is why large technology stocks and high-growth stocks have pushed the market lower in recent years. Amazon, Nvidia and Tesla were among the heaviest weights on the S&P 500 Friday, and each dropped at least 2%.
Concerns about the strength and stability of the economy are also increasing. The Federal Reserve is set to raise rates so aggressively that it fears it will push the brakes too fast and force the economy into recession. Although this is not the consensus on Wall Street’s view, Deutsche Bank economists earlier this week stated that they expect a U.S. recession by the end of next year.
The war in Ukraine has made matters more uncertain, threatening to increase inflation and cause serious economic damage. Since Russia invaded Ukraine, oil, gas, and food prices have been volatile. A barrel of U.S. benchmark crude oil rose $2. 23 to settle at $98. 26 on Friday. It has swung wildly in recent weeks and briefly topped $130 last month. Brent crude oil, the international standard, increased $2. 20 to settle at $102. 78 per barrel.
The bond market has been the focus of the market. Expectations for a more aggressive Fed have led to yields at their highest level in three years. The 10-year yield climbed to 2. 71% from 2. 65% late Thursday. It was just 1. 51% at the start of the year. It could rise further as the Fed stops and reverses its program of buying trillions of dollars worth of bonds.
Bond buying helped stock prices and other financial assets soar while markets remained relatively calm, Michael Hartnett, Chief Investment Strategist at BofA Global Research reported.
The Fed is less than one month away from reverseing that, which “by design” will be a negative for financial assets, Hartnett stated. Hartnett stated that it would lead to higher bond yields, and greater volatility in the markets.
Meanwhile, COVID-19 continues to squeeze the economy around the world, particularly in China. Due to an increase in infections, Shanghai residents are restricted from moving and engaging in certain activities. The economic consequences are sweeping the globe.
ACM Research is a supplier of equipment to the semiconductor industry with operations in Shanghai. It said that the restrictions would cause a significant drop in its revenue. Its stock fell 6.1%.
A jump in COVID-19 cases is also behind airline disruptions in Europe. Two major airlines, British Airways and easyJet, canceled about 100 flights Wednesday. The virus is causing staff shortages in the industry.
AP Business Writer Yuri Kageyama contributed.
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