U.S. stocks fell sharply, led by technology and other growth stocks, as investors assessed the implications of Federal Reserve’s most aggressive tightening of monetary policy in more than two decades.
The S&P 500 dropped 3.7% as losses accelerated in midday trading Thursday. The tech-focused Nasdaq Composite Index fell 4.9%, and the Dow Jones Industrial Average retreated 3.2%, or 1,080 points. All three indexes are on track to erase Wednesday’s gains.
In the bond market, the yield on the benchmark 10-year Treasury note rose to 3.084%, from 2.914% Wednesday. Bond prices and yields move in opposite directions. On Wednesday, bonds prices staged a rebound alongside stocks before losing steam.
“The Fed is reducing liquidity in the markets and that’s driving up volatility, and so this could be our new normal here for a bit until the Fed gets inflation under control and changes the policy,” said John Ingram, chief investment officer and partner at Crestwood Advisors.
The pullback came one day after major U.S. stock indexes soared, with the Dow climbing more than 900 points, its biggest one-day gain since 2020. On Wednesday, central bank officials approved a half-percentage-point interest rate increase, lifting the federal-funds rate to a target range between 0.75% and 1%.
But it was Fed Chairman Jerome Powell who initially energized markets after he said officials weren’t actively considering raising rates by three-fourths of a percentage point. He instead indicated that additional half-point increases could be warranted at coming meetings.
Mr. Powell’s comments offered relief to investors who had become increasingly fearful that the Fed could raise interest rates too far, too fast and eventually tip the economy into a recession.
“The market yesterday was a relief rally,” said Seema Shah, chief strategist at Principal Global Investors. By Thursday, she said, the realities of a more challenging environment for stocks were starting to settle in. Though she said she believes inflation has peaked or is close to peaking, other macroeconomic considerations will continue to weigh on investors and the path of interest rates, she said.
Even with a larger interest-rate increase off the table in the coming months, investors are still facing the most aggressive tightening of U.S. monetary policy since 2000—the last time the central bank last raised rates by a half-point.
Many investors are now questioning how high the Fed might raise rates over the next two years amid soaring inflation and how that might ripple across the economy and corporate profits.
“It’s like when we all take medication, it’s got to build up in your system and these Fed-fund rises always have a lag time,” said Tim Horan, co-chief investment officer of fixed income at Chilton Trust.
“Meanwhile, the market pricing in so much more is a tightening of financial conditions that have a knock-on effect on the real estate market, mortgages. That’s getting some of the Fed’s job done until that medication builds up enough that it really becomes the decisive ‘slay the dragon moment.’”
Higher interest rates can diminish the allure of technology stocks by reducing the value that investors place on their future earnings. Higher yields in general also boost the attractiveness of fixed-income products versus riskier assets such as stocks.
Etsy tumbled 16% after the online marketplace released guidance below expectations for the current quarter. eBay lost 10% after cutting guidance on impacts from the war in Ukraine.
Shares of Wayfair also slid, losing 21%, after the online home goods retailer posted a bigger-than-expected quarterly loss. Shopify’s first-quarter earnings missed analysts’ expectations, sending the stock down 17%.
“We struggle to see who is going to be a massive buyer of equities in the next couple weeks,” said Viraj Patel, global macro strategist at Vanda Research. “It’s a waiting game for that catalyst…You need more conviction from the data, either to show that inflation has topped out or the economy is slowing and that the Fed won’t need to be as aggressive.”
Bucking the trend, shares of Twitter jumped 3.5% to $50.85 after Tesla Chief Executive Elon Musk said he has received letters from investors committing more than $7 billion in fresh financing to boost the equity part of his 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 5% after its revenue exceeded expectations and it said it has seen strengthening of global travel trends in the current quarter.
Assets that investors perceive as safer were among those to rally Thursday as money managers looked for havens as stocks and bonds fell in tandem. Even after Wednesday’s rally, some strategists and investors said they were hesitant about the stock market’s outlook in the weeks and months ahead.
“If they try to do too much and the market comes unglued, then they’ve [Fed] kind of shot themselves in the foot because it will make it difficult to do future rate hikes,” said Jordan Kahn, chief investment officer at ACM Funds. “That’s the fine line the Fed is trying to walk—to do as much [rate increases] as they think the market can digest without upsetting it too much.”
The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, rose 1.3%. On Wednesday, the index tumbled 0.9%, its largest decline since November 2020. The dollar’s status as the world’s reserve currency makes it a particularly attractive haven for investors.
Gold prices, another preferred haven, also climbed, rising 0.6% to $1,879.70 a troy ounce.
The British pound dropped 2% against the dollar to $1.2378 after the Bank of England raised interest rates, but signaled that it is likely to move cautiously in coming months as worries grow over a slide into recession.
Overseas, the pan-continental Stoxx Europe 600 fell 0.7%. Banks, technology stocks and transport companies were among those that rallied. Italian bank UniCredit climbed 4% after its revenue came in above analyst expectations. Airbus jumped 6.6% after the plane maker reported an increase in net income and moved to increase production of its bestselling A320 single-aisle airliner.