Wall Street stocks plummeted on Thursday as investors grew more concerned that central banks were focused on fighting inflation instead of supporting the market.
The sell-off accelerated as the closing bell neared, with investors anxious about a report due out Friday that could provide insight into the U.S. inflation.
The S&P 500 index fell 2.4% and was on track for its ninth loss in 10 sessions. The Dow Jones industrial average lost 1.9%, and the tech-heavy Nasdaq composite lost 2.7%.
The sell-off came from the other side of the Atlantic after the European Central Bank surprised markets by announcing that it would raise interest rates for the first time in a decade. The ECB also said it would stop buying bonds.
According to Marilyn Watson, a global fixed-income strategy manager at BlackRock, the decision by the ECB to raise interest rates marks a significant change in its policy. It's part of a worldwide trend toward higher interest rates, which are being used by central banks to slow down the growth of their economies and combat high inflation. Before the pandemic outbreak, the world's central banks had been keeping interest rates at record lows to stimulate economic growth.
The risk is that the central banks might get too aggressive in stimulating the economy. Higher interest rates could cause a recession. Even if they manage to avoid one, the impact of higher rates on the stock market would be significant.
"We're getting prepared for what the news might be regarding inflation tomorrow [Friday]," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.
"I view it as mixed. If the total is high and the core number shows some sort of drop, I actually think the markets could rally on that because it'll show that things are kind of rolling over a bit."
Federal Reserve expected to raise interest rates
The market expects the Federal Reserve to raise its key interest rate by a quarter of a percentage point next week. It's also expecting another increase in July.
The Fed's path will be determined by the country's inflation. On Friday, investors will closely watch the May consumer price index. Economists expect it to show that inflation slowed to around 8.2% from 8.3% in April.
If inflation is at its peak, it could mean that the Fed is less aggressive in its efforts to stimulate the economy. That would be good for stocks, as it would mean that the central bank would be less likely to raise interest rates aggressively. However, it's also possible that the Fed could pause its rate increases in September.
With that said, stocks are prone to experiencing big swings. On Thursday, the S&P 500 lost almost a hundred points, while the Dow Jones Industrial Average and the Nasdaq fell more than 300 points.
European stocks immediately fell after the ECB surprised markets by announcing that it would raise interest rates for the first time in a decade. France's CAC 40 index fell 1.4%, while Germany's Dax lost 1.7%.
Investors in wait-and-see phase
Investors are still looking for signs of how the economy is performing as the Fed's rate hike cycle continues. They also want to know how the central bank will respond to the rising interest rates.
The latest jobless claims report by the Department of Labor showed that the labor market continues to strengthen. This data suggests that the central bank is still on track to continue raising interest rates. As it fights against inflation, the central bank has carefully monitored the labor market's trends.
The rise in jobless claims also supports the anecdotal evidence that suggests that the private sector is still struggling to find workers. According to Christopher Rupkey, a chief economist at FBR Capital, the increasing number of people receiving unemployment benefits suggests that the labor market is still not improving. He also noted that the implementation of cost control measures will likely help prevent the rise in joblessness.