By STAN CHOE – AP Business Writer
NEW YORK (AP) — Markets around the world are back to falling on Thursday, and Wall Street is down about 3% in widespread annihilation as worries about a fragile economy return to the fore.
The S&P 500 was down 3.1% in afternoon trade, more than reversing its 1.5% rebound from the previous day. Analysts had warned of bigger swings given deep uncertainties over whether the Federal Reserve and other central banks can take the narrow path of raising interest rates enough to get inflation under control, but not to the point of triggering a recession.
The Dow Jones Industrial Average was down 687 points, or 2.2%, at 29,980 as of 1:26 p.m. EST, and the Nasdaq composite was down 3.9%. The S&P 500 was on track for its sixth loss in the past seven days, and all but five of the index’s 500 companies were down.
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Wall Street fell along with stocks across Europe after central banks followed the Federal Reserve’s interest rate hike on Wednesday. The Bank of England raised its key rate for the fifth time since December, although it opted for a more modest rate of 0.25 percentage points than the hammer of 0.75 points brought by the Fed.
The Swiss central bank, meanwhile, raised rates for the first time in years, a hike of half a point. Taiwan’s central bank raised its key rate by an eighth of a point. Japan’s central bank has kicked off a two-day policy meeting, though it is holding back on raising rates and other measures to slow the economy that investors are calling “hawkish.”
“The clear reading here is that the FOMC (Fed) has released the central bank Hawkish Genie from the bottle, and we should expect more aggressive follow-through from other central banks except those in economic difficulty,” Stephen Innes of SPI Asset management said in a comment.
Such moves and expectations for many more around the world have sent all manner of investments plummeting this year, from bonds to bitcoin. Higher interest rates purposely slow the economy, hoping to eradicate inflation. But they are blunt tools that can stifle the economy if used too aggressively.
“Another concern is that with the change in policy, the economic data has already weakened,” said Bill Northey, chief investment officer at US Bank Wealth Management. “This increases the chances of a recession in the latter part of 2022 to 2023.”
Worries sent the S&P 500 into a bear market earlier this week, meaning it had fallen more than 20% from its peak. That’s now more than 23% below its record set earlier this year, and it’s back to where it was at the end of 2020.
Not only is the Federal Reserve raising short-term rates, but it also this month began allowing some of the trillions of dollars in bonds it bought during the pandemic to come off its balance sheet. This should put upward pressure on long-term interest rates.
The US economy is still largely holding up, driven in particular by a dynamic job market. Fewer workers applied for unemployment benefits last week than a week earlier, according to a report on Thursday. But other signs of trouble have emerged.
A report on Thursday showed homebuilders innovated on fewer homes in the past month. The rise in mortgage rates resulting directly from the Fed’s decisions is being felt in the industry. A separate reading on manufacturing in the Mid-Atlantic region also unexpectedly dropped.
“Corporate earnings estimates have yet to change to reflect some of the weaker economic data and that could lead to the second leg of this price revision,” Northey said.
More and more economists are considering the possibility of a recession in the United States. At Deutsche Bank, economists have in recent months raised their forecasts for when a recession could hit. They see it happening around mid-2023.
Treasury yields hovered on Thursday, with the 10-year yield down to 3.33% from 3.39% late Wednesday. It had climbed to 3.48% earlier in the morning, near its highest level since 2011.
Higher rates have been hit the hardest by investments that have risen the most during the pandemic, benefiting from easy and ultra-low rates. This includes bitcoin and high-growth tech stocks.
Declines in Apple, Amazon, Tesla and other big tech-focused stocks provided some of the heaviest weightings in the S&P 500. Each fell at least 3.4%.
But the biggest losses came for stocks whose earnings depend more on the strength of the economy and the ability of customers to keep shopping going amid the highest inflation in decades.
Cruise line Carnival fell 9.9% and Capital One Financial fell 6.4%.
It’s quite a sharp turnaround from the day before, when stocks rallied on Wall Street immediately after the Fed’s biggest rate hike since 1994. Analysts said investors appeared to be hanging on to comment from Fed Chairman Jerome Powell, who said mega hikes of three-quarters of a percentage point would not be common.
Powell said on Wednesday the Fed was moving “quickly” to bring rates closer to normal levels after last week’s stunning report that showed consumer inflation unexpectedly accelerated last month, which dashed hopes that inflation had already peaked.
The Fed is “not trying to cause a recession now, let’s be clear about that,” Powell said. He called Wednesday’s surge “front-loading.”
“Despite their assurance, I don’t know if the Fed has the tools it claims it has to drive prices down,” said Jason Brady, CEO of Thornburg Investment Management. He also said that even after its mega hike on Wednesday, which was triple the usual amount, “the Fed is still behind.”
Even without a recession, higher interest rates make investors less inclined to pay high prices for investments, especially those considered more expensive or riskier.
Bitcoin threatened to tumble to $20,000 after setting a record close to $69,000 late last year. It was at $21,280 in afternoon trading, down 2.3% in the past 24 hours, according to CoinDesk.
AP Business Writers Damian J. Troise and Yuri Kageyama contributed.
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