Wall Street tumbles, Dow loses 697 on fears about high rates

NEW YORK — Stocks tumbled to their worst day in two months Tuesday, buckling under worries about higher interest rates and their tightening squeeze on Wall Street and the economy.

The S&P 500 fell 2% for its sharpest drop since the market was selling off in December. The Dow Jones Industrial Average lost 697 points, or 2.1%, while the Nasdaq composite sank 2.5%.

Home Depot fell to one of the market’s larger losses after giving financial forecasts that fell short of Wall Street’s expectations. It dropped 7.1% despite reporting stronger profit for the last three months of 2022 than expected.

The retailer said it would spend $1 billion to increase wages for hourly U.S. and Canadian workers. That fed into broader worries for markets that rising costs for companies have been eating into profits, which are one of the main levers that set stock prices.

The other main lever is also looking precarious as interest rates continue to rise. When safe bonds are paying higher amounts of interest, they make stocks and other investments look less attractive. Why take a lot of risk on stocks if safer things are paying out more? Higher rates also raise the risk of a recession because they slow the economy in hopes of snuffing out inflation.

Rates and stock prices are high enough that strategists at Morgan Stanley say U.S. stocks look to be more expensive than at any time since 2007.

The yield on the 10-year Treasury, which helps set rates for mortgages and other important loans, leaped further to 3.95% from 3.82% late Friday. The twoyear yield, which moves more on expectations for the Fed, rose to 4.72% from 4.62%. It’s close to its highest level since 2007.

“That is what’s weighing on the market,” said Keith Lerner, chief market strategist at Truist Advisory Services.

Yields have shot higher this month as Wall Street ups its forecasts for how high the Federal Reserve will take short-term interest rates in its efforts to stamp out inflation. The Fed has already pulled its key overnight rate up to a range of 4.50% to 4.75%, up from basically zero at the start of last year.

Several reports have come in recently to show the economy remains stronger than expected. Those allay fears that the economy may soon fall into a recession, which is a positive for the market. But on the negative side, they could also fuel upward pressure on inflation and give the Fed more reason to stick to the “higher for longer” campaign it’s been espousing for rates.

The latest evidence came from a preliminary report Tuesday that suggested business activity was gaining momentum. The services industry likely returned to growth last month and was at an eight-month high, according to S&P Global. Manufacturing, meanwhile, may still be contracting, but the reading hit a fourmonth high.

Such strength has caused the more pessimistic investors on Wall Street to keep their forecasts for a recession but move its timing later into the year.

The Fed said in December that its typical policy-maker sees short-term rates rising to 5.1% by the end of this year with the earliest cut to rates happening in 2024. After earlier thinking the Fed would ultimately take it easier on rates than it was talking about, Wall Street has largely come into closer alignment with the Fed’s view.

The worry is that the Fed could ratchet up its forecasts for rates further next month when it releases its latest projections for the economy.

Those worries have caused a stall for the strong rally by Wall Street to start the year. After earlier jumping as much as 8.9%, the S&P 500 is now clinging to a gain of 4.1% for the year so far.

All told, the S&P 500 fell 81.75 points to 3,997.34. The Dow lost 697.10 to 33,129.59 and is down for the year to date. The Nasdaq fell 294.97 to 11,492.30.

In stock markets abroad, shares mostly fell after manufacturing indicators in Europe and Asia painted a mixed picture.