Stocks drop in an ugly day as allure grows to buy a Treasury bill and chill
Wall Street fell sharply Thursday in an ugly day for stocks worldwide on expectations that U.S. interest rates will stay high well into next year.
The Standard & Poor’s 500 index lost 1.6% for its worst day since March. That followed a 0.9% drop Wednesday after the Federal Reserve indicated it may cut interest rates next year by only half of what it had earlier predicted. The Fed has already raised its main interest rate to the highest level since 2001, which helps slow inflation but at the cost of hurting investment prices.
High-growth stocks are typically among the hardest hit by high rates, and Big Tech stocks again took the brunt of the pain for a second straight day. The Nasdaq composite dropped 1.8% as Amazon fell 4.4%, Nvidia dropped 2.9% and Telsa lost 2.6%. The Dow Jones industrial average shed 1.1%.
The Federal Reserve left its key interest rate unchanged for the second time in its last three meetings, a sign that it’s moderating its fight against inflation.
Stock prices tend to fall when rates rise because stocks are historically risky investments. Why stomach the chance of their big swings when Treasurys are paying more in interest than before? And they’re paying much more.
A 10-year Treasury is offering a yield of 4.48%, up from 4.40% late Wednesday and from 0.50% three years ago. It’s near its highest level since 2007.
The two-year Treasury yield, meanwhile, wavered after mixed reports on the economy. It slipped to 5.14% from 5.17% late Wednesday after climbing earlier in the morning.
One report showed that fewer U.S. workers applied for unemployment benefits last week than expected. It was the lowest number since January and the latest signal of a remarkably resilient job market.
Such a solid labor market helps calm worries about a possible recession. But it may also give U.S. households fuel to keep spending, which could encourage companies to try to raise prices further and keep upward pressure on inflation.
Several thousand Middle Class Tax Refund payments, first disbursed last fall, will be sent to the final recipients by the end of this month, officials say.
A separate report, meanwhile, suggested manufacturing in the mid-Atlantic region is contracting by much more than economists expected. A third report showed sales of previously occupied U.S. homes were weaker last month than economists expected.
Manufacturing and the housing industry have felt the sting of higher interest rates in particular and have struggled more than the broad job market.
Interest rates may stay high if the Federal Reserve follows through on the latest forecasts from its policymaking officials.
Policymakers have indicated they could raise the federal fund rate one more time this year, and then cut it by only half a percentage point from there through 2024. Three months ago, Fed officials were indicating a full percentage point of cuts would be the most likely path. They want to ensure inflation gets back down to the Fed’s target of 2%.
Wednesday’s projections may be an indication that “raises the bar for rate cuts next year,” according to Goldman Sachs economist David Mericle. He pushed out his forecast for the first cut in interest rates to the final three months of 2024, after earlier thinking it could happen during the spring.
Despite more than a year of widespread warnings that a recession was near, America’s economy is, if anything, accelerating.
He sees the Fed on a path where it can “simply wait until something goes wrong and then deliver either small cuts in response to a smaller growth threat, similar to the insurance cuts of 2019, or substantial cuts in response to a full recession,” he wrote in a report.
In 2019, the Fed cut interest rates amid fears that high rates could help send the economy into a recession as trade tensions flared around the world.
High rates slow the economy and raise the pressure across the financial industry. This spring, they helped lead to three high-profile collapses of U.S. banks. They also hurt prices for all kinds of investments, but they often hit hardest on those bid up on hopes for big growth far out in the future. That’s why tech stocks in particular often swing with expectations for rates.
Cisco Systems took a hit after it said it would buy Splunk, a cybersecurity company, for roughly $28 billion in cash. Cisco fell 3.9%, while Splunk jumped 20.8%.
On the winning side of Wall Street, FedEx rose 4.5% after it reported stronger profit for the latest quarter than analysts expected.
All told, the S&P 500 fell 72.20 points to 4,330.00 and is back to where it was in June. The Dow dropped 370.46 points to 34,070.42, and the Nasdaq lost 245.14 points to close at 13,223.99.
London’s FTSE 100 slipped 0.7% after the Bank of England left interest rates steady. The expectation had been for another rate increase, but a surprising report this week showed a drop in British inflation.
Stock markets elsewhere around the world were much weaker.
Japan’s Nikkei 225 fell 1.4%, South Korea’s Kospi dropped 1.7% and France’s CAC 40 lost 1.6%.
New Zealand’s benchmark index fell less than 0.1% as figures released Thursday by Statistics New Zealand indicated the economy expanded at a 3.2% annual pace in the April-through-June quarter. Finance Minister Grant Robertson said the economy was turning a corner and growing at twice the rate predicted by economists.
AP writers Matt Ott, Elaine Kurtenbach and Nick Perry contributed to this report.
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