Stocks cratered in trading Thursday, logging their worst day since 2020 as Wall Street grew skittish over the Federal Reserve’s high-wire effort to combat inflation without derailing the US economy.
The Dow Jones Industrial Average plunged 1,063.09 points, erasing more than 3% of its value. The tech-heavy Nasdaq index was down 5%, or more than 600 points, while the broad-based S&P 500 was down 3.6% or 153 points.
The brutal selloff occurred just one day after stocks had rallied, with the Dow finishing more than 900 points higher over the Federal Reserve’s move to hike interest rates by a half-percentage point, with Fed Chair Jerome Powell indicated the central bank was not considering an interest rate hike of 75 basis points, or 0.75%.
That relief, however, quickly abated on Thursday, with investors skeptical that the central bank can engineer a “soft landing” for the economy without hurting the labor market or prompting a recession.
“There’s been a lot of skepticism overall about whether or not [the Fed] can do that. Historically, the odds aren’t in their favor,” said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.
Concerns about the Fed’s difficult task added to existing overhangs on the market, such as renewed COVID-19 lockdowns in China that could further disrupt supply chains and the ongoing Russia-Ukraine war.
Several banks, including Bank of America and Goldman Sachs, have warned of a heightened risk of a recession in the coming months as the Fed moves to address inflation.
While Powell’s remarks downplaying the likelihood of a larger interest rate hike triggered a “relief rally,” investors “woke up this morning and said, ‘We’re no better off than we were when we woke up yesterday,’” according to Jake Dollarhide, CEO of Longbow Asset Management.
“Interest rates are higher, there’s still a war going on in Europe, there’s still global supply chain disruptions — which is all affecting inflation. The question is, can the Fed bring inflation to a halt without destroying the economy? Right now, there’s a lot of people on the fence,” Dollarhide added.
The high-growth tech sector, seen as particularly vulnerable to rising rates after seeing blockbuster growth during the COVID-19 pandemic, was among the hardest hit, with the S&P 500’s tech sector slumping nearly 6%.
Frederick noted that “highly leveraged” growth stocks that flourished as investors poured in money during a period of lenient Fed policy are now faced with the prospect of their debt becoming more expensive in the months ahead.
“Higher interest rates are going to hurt them even further. The future isn’t promising for those that are indebted and have to roll over that debt at an even higher rate next time they have to refinance,” he added.
The Fed’s plan is to slow demand by making it more expensive to borrow money – a shift that comes after years of relaxed policy during the COVID-19 pandemic.
The CBOE Volatility Index, known as Wall Street’s “fear gauge,” surged 28% to 32.70 points.
Bond yields rose higher, with benchmark 10-year Treasury notes jumping to 3.06% from 2.914% — the highest level since late 2018. The uptick means mortgage rates will move higher – raising costs for prospective home buyers.
The “bond move is the bigger story” than volatility in stocks, according to Eric Freedman, chief investment officer at US Bank in Minneapolis.
“The bond market is normally a haven for investors who want to de-risk portfolios, but with an uncertain Fed, markets are not convinced they have priced in enough hikes,” Freedman said.
Amazon shares traded more than 7% lower. Meta fell 6.8% and Apple sank more than 5%.
Shares of Twitter turned 2.7% higher after Elon Musk disclosed he has secured more than $7 billion in funding toward his takeover bid. But Tesla’s stock was trading lower following a report that Musk planned to serve as Twitter’s interim CEO when the deal closes.