Stocks slide as volatility continues to reign
Stocks dived Thursday, erasing gains from their best day since 2020 in a swing that highlights Wall Street’s heightened anxiety over what the Federal Reserve’s campaign to slow inflation will mean for the economy.
The S&P 500 fell 3.6 percent, after surging 3 percent Wednesday. The Nasdaq composite slid 5 percent, its biggest drop since June 2020.
The volatility was on display in other financial markets, too. Yields on government bonds spiked, with the rate on 10-year U.S. Treasury notes, a benchmark for borrowing costs across the economy, climbing above 3 percent and touching its highest level since 2018, reversing a drop Wednesday.
The stock market’s gyrations, which have become more dramatic than usual, show that the debate over the fate of the economy is far from settled. Investors are worried that the combination of rising prices and rising interest rates will hit consumer spending, corporate profits and economic growth. In between bouts of panic, glimmers of good news like upbeat corporate earnings reports or reassuring economic data have resulted in big rallies.
“The highly uncertain economic, inflation and interest rate outlook is driving the more frequent, large swings in investor sentiment in both the stock and bond markets,” said Kathy Bostjancic, the chief U.S. financial economist at Oxford Economics.
Stocks soared Wednesday after the Fed chairman, Jerome Powell, assured investors during a news conference that policymakers weren’t considering extraordinarily large increases in interest rates — specifically ruling out a 0.75 percentage point jump that some analysts had started to predict. The Fed did raise its benchmark rate by half a percentage point, but that increase was widely expected.
Thursday’s decline erased that gain, but stocks were still slightly higher for the week and a touch above their lowest point of the year, reached last Friday.
Still, Thursday’s drop was an acknowledgment from investors that while the Fed might not go as far as raising interest rates by three-quarters of a percent in one day, it is quickly withdrawing support for the economy. The central bank also plans to shrink its nearly $9 trillion bond holdings, a move that could directly affect financial markets.
The Fed is aiming to dampen demand and cool off price gains that are now at their fastest in more than four decades after initially labeling inflation a “transitory” result of the reopening of the economy from a year of lockdowns and restrictions. The Fed’s shift in tone has made investors rethink their appetite for risky investments, like stocks.
“Investors have watched the Fed move from its theory that inflation would be transitory to one of considerable concern about its potential duration and toll on the economy,” said Scott Knapp, the chief market strategist at CUNA Mutual Group said.
The Fed has acknowledged that some factors behind rising prices are out of its reach, namely Russia’s invasion of Ukraine, which has pushed energy prices higher, and China’s recent pandemic lockdown, which could further disrupt an already unsteady supply chain. Powell said Wednesday that lowering inflation without causing a recession — what economists refer to as a “soft landing” — would be difficult.
“I do expect that this will be very challenging; it’s not going to be easy,” Powell said, though he did express optimism that the Fed could achieve it.