Stocks plummeted Thursday as Wall Street reversed from a torrid post-rate hike rally into its worst day of losses this year.
The Dow Jones Industrial Average fell by 1,060 points Thursday, closing with a loss of 3.1 percent. The S&P 500 fell 3.6 percent on the day and the Nasdaq plunged 5 percent lower before the opening bell. The Dow and Nasdaq suffered their worst single-day losses since 2020 and the S&P suffered its second-worst day of the year, according to CNBC.
All three indexes closed with gains of roughly 3 percent Wednesday, respectively, after the Federal Reserve hiked interest rates by 0.5 percentage points.
Markets rallied Wednesday after Fed Chair Jerome Powell said the central bank wasn’t currently considering a larger 0.75 percentage point rate hike in future meetings. But Wall Street’s confidence appeared to slip Thursday morning as investors reckoned with how high the Fed may need to raise interest rates regardless of Powell’s current expectations.
“The stock market was irrationally exuberant yesterday when it rallied sharply,” said Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance, in a Thursday analysis.
“When the Fed raises rates quickly it is dangerous to the stock market and today we are seeing an example of that,” he continued. “We continue to believe that the Fed is going to aggressively fight inflation by tightening financial conditions, regardless of how much damage that inflicts on the stock market in the near term.”
Fed rate hike cycles often take a toll on the stock market as companies brace for higher borrowing costs and slower consumer spending. While hiking interest rates is the Fed’s most influential tool for bringing inflation down, it also narrows corporate profit margins and makes riskier investments with longer-term returns less attractive to both businesses and investors.
Shares of technology companies led the market’s downturn Thursday, with Etsy, Ebay, Intuit, Salesforce, Microsoft and Apple taking the steepest plunges. Investors consider tech companies more sensitive to rising interest rates since many take on high levels of debt. Tech companies also soared in value over the past two years, giving high-flying shares plenty of room to fall.
Nike, Home Depot, Visa, Honeywell, Visa and Goldman Sachs also fell sharply Thursday, which can signal concerns about a slowdown in consumer spending. Yields on Treasury bonds, a predictor of future interest rate levels, additionally shot up as the bond market braced for a faster pace of rate hikes.
The Fed is aiming to raise interest rates fast enough to curb the highest annual inflation in more than 40 years without slowing a strong economy into a recession. Even so, there is growing concerns among policymakers and economists about whether the Fed will be able to do so amid several threats to the U.S. economy.
“For what it’s worth, we believe the risk of recession is elevated and should not be dismissed. Expectations are that the Fed will hike rates by a similar amount at the next couple of [Fed] meetings,” wrote Liz Ann Sonders, chief investment strategist at Charles Schwab, in a Wednesday analysis.
Along with record-breaking U.S. consumer demand, supply chain disruptions and pandemic-related shutdowns in China have boosted pressure on prices. The war in Ukraine has also driven up food and energy prices across the world while also threatening to plunge Europe into a recession.
While Powell said Wednesday there is “a path” for the Fed to slow inflation without causing a recession, he acknowledged it would be “very challenging” and that the central bank would do whatever is necessary to stop prices from rising further. Powell added that with record demand for labor, 1.7 million jobs added in 2022 so far and steady consumer spending, the U.S. economy was well equipped to handle the headwinds.
“We see restoring price stability as absolutely essential for the country,” Powell said. “Without price stability, the economy doesn’t work for anybody.”
Even so, some former Fed officials believe it will be impossible for the U.S. to avoid a recession given how high inflation has already risen and how much higher the Fed’s baseline interest rate must rise to cool it.
“A recession is, at this stage, almost inevitable because they don’t control supply, and we’ve seen how volatile supply can be with the shutdown in China. We also see uncertainty about oil prices up and down,” said former Fed Vice Chair Roger Ferguson in a Thursday interview on CNBC.
“Some people are going to be harmed earlier than others, but, you know, they have no choice. They’ve got to maintain credibility,” he said.