US: Wall Street tumbles on fears for economy as more rates rise

Stocks tumbled on Wall Street Thursday as worries roared back to the fore that the world’s fragile economy may buckle under higher interest rates.

The S&P 500 fell 3.3 per cent in a widespread rout to more than reverse its blip of a 1.5 per cent rally from a day before. Analysts had warned of more big swings given deep uncertainties about whether the Federal Reserve and other central banks can tiptoe the narrow path of hiking interest rates enough to get inflation under control but not so much that they cause a recession.

The Dow Jones Industrial Average lost 2.4 per cent and was briefly down more than 900 points, while the Nasdaq composite sank 4.1 per cent. It was the sixth loss for the S&P 500 in its last seven tries, and all but 3 per cent of the stocks in the index dropped.

Wall Street fell with stocks across Europe after central banks there followed up on the Federal Reserve’s big interest-rate hike on Wednesday. The Bank of England raised its key rate for the fifth time since December, though it opted for a more modest increase of 0.25 percentage points than the 0.75-point hammer brought by the Fed.

Switzerland’s central bank, meanwhile, raised rates for the first time in years, a half-point hike. Taiwan’s central bank raised its key rate by an eighth of a point. Japan’s central bank began a two-day meeting, though it’s held out on raising rates and making other economy-slowing moves that investors call “hawkish.”

Such moves and expectations for plenty more have sent investments tumbling this year, from bonds to bitcoin. Higher interest rates slow the economy by design, in hopes of stamping out inflation. But they’re a blunt tool that can choke off the economy if used too aggressively.

“Another concern is that with the change in policy, there’s been weakening economic data already,” said Bill Northey, senior investment director at U.S. Bank Wealth Management. “That raises the odds of a recession in the latter part of 2022 into 2023.”

President Joe Biden told the Associated Press on Thursday that he saw reasons for optimism about the economy and that a recession is “not inevitable.”

The worries dragged the S&P 500 into a bear market earlier this week, meaning it had dropped more than 20% from its peak. It’s now 23.6% below its record set early this year and back to where it was in late 2020. That effectively erases 2021, which was one of the best years for Wall Street since the turn of the millennium.

The S&P 500 fell 123.22 points to 3,666.77. The Dow lost 741.46 to 29,927.07, and the Nasdaq dropped 453.06 to 10,646.10. Thursday’s biggest losses hit the stocks of the smallest companies, a signal of pessimism about the economy’s strength. The Russell 2000 index of smaller stocks sank 81.30, or 4.7 per cent, to 1,649.84.

Not only is the Federal Reserve hiking short-term rates, it also this month began allowing some of the trillions of dollars of bonds it purchased through the pandemic to roll off its balance sheet. That should put upward pressure on longer-term interest rates. It’s another way central banks have been ripping away supports they earlier propped underneath markets to juice the economy.

The U.S. economy is still holding up, driven in particular by a strong jobs market. Fewer workers filed for unemployment benefits last week than a week before, a report showed on Thursday. But more signs of trouble have been emerging.

On Thursday, one report showed homebuilders broke ground on fewer homes last month. Rising mortgage rates resulting directly from the Fed’s moves are digging into the industry. A separate reading on manufacturing in the mid-Atlantic region also unexpectedly fell.

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“Despite their assurance, it’s unclear to me whether the Fed has the tools they say they do to tamp down prices,” 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.”