Energy prices ended significantly lower as traders worried about a potential recession. Treasury yields, which affect interest rates on mortgages and other types of credit, remained at multi-year highs.
European stocks fell as much or more after preliminary data suggested business activity there posted its worst monthly decline since early 2021. Additional pressures came from a new tax cut plan announced in London, which sent UK yields higher as it was eventually able to force the central bank to hike rates even more.
The Federal Reserve and other central banks around the world aggressively hiked interest rates this week in hopes of undercutting high inflation, with promises of more big hikes in the future. But such moves also slow their economies and threaten recessions as global growth slows. Aside from Friday’s discouraging data on European business activity, a separate report suggests the US economy is also contracting, albeit not quite as sharply as in previous months.
“Financial markets are now fully embracing the Fed’s harsh message that there will be no inflation retreat,” wrote Douglas Porter, chief economist at BMO Capital Markets, in a research note.
US crude prices slipped 5.7 percent to their lowest level since earlier this year on fears a weaker global economy will burn less fuel. Cryptocurrency prices also fell sharply, as higher interest rates tend to hit investments that look the most expensive or risky the hardest.
Even gold fell in the global slide as higher-yielding bonds make non-interest-paying investments less attractive. Meanwhile, the US dollar has moved sharply higher against other currencies. This can hurt profits for US companies with many foreign operations and put financial pressure on much of the developing world.
The S&P 500 fell 64.76 points to 3,693.23, its fourth straight decline. The Dow, which was down more than 800 points at one point, lost 486.27 points to close at 29,590.41. The Nasdaq fell 198.88 points to 10,867.93.
Smaller company stocks fared even worse. The Russell 2000 fell 42.72 points, or 2.5 percent, to close at 1,679.59.
More than 85 percent of stocks in the S&P 500 ended lower, with technology companies, retailers and banks among the largest weights in the benchmark index.
The Federal Reserve on Wednesday raised interest rates, which affect many consumer and business loans, to a range of 3 to 3.25 percent. It was practically zero at the beginning of the year. The Fed also issued a forecast that its interest rate could come in at 4.4 percent by the end of the year, a full point higher than forecast in June.
Government bond yields have climbed to multi-year highs as interest rates have risen. The 2-year Treasury yield, which is trending in line with expectations for Federal Reserve action, rose to 4.20 percent from 4.12 percent late Thursday. It is trading at its highest level since 2007. The 10-year Treasury yield, which drives mortgage rates, slipped to 3.69 percent from 3.71 percent.
Goldman Sachs strategists say the majority of their clients now see a “hard landing,” dragging the economy sharply lower, as inevitable. For them, the only question is the timing, extent and duration of a possible recession.
Higher interest rates hurt all types of investments, but stocks could remain stable as long as corporate earnings grow strongly. The problem is that many analysts are starting to lower their forecasts for earnings ahead due to higher interest rates and fears of a possible recession.
“Market psychology has increasingly shifted from concerns about inflation to concerns that corporate earnings will at least fall if economic growth slows demand,” said Quincy Krosby, chief global strategist at LPL Financial.
In the US, the job market remained remarkably solid and many analysts believe the economy grew in the summer quarter after contracting for the first six months of the year. But the encouraging signs also suggest that the Fed may need to hike further to achieve the cooldown needed to bring inflation down.
Some key areas of the economy are already weakening. Mortgage rates have hit 14-year highs, causing existing home sales to fall 20 percent over the past year. But other areas that do best when interest rates are low are also suffering.
In Europe, meanwhile, the already weak economy is grappling with the aftermath of the war on the Eastern Front following Russia’s invasion of Ukraine. The European Central Bank is raising interest rates to fight inflation, even as the region’s economy looks set to slide into recession. And in Asia, China’s economy is struggling with still-tight measures to limit Covid infections, which are also hurting businesses.
While Friday’s economic reports were disheartening, few on Wall Street felt they were enough to persuade the Fed and other central banks to tone down their stance on rate hikes. So they only increased fears that interest rates will continue to rise given the already slowing economies.