Wall Street plunged Tuesday after Federal Reserve chairman Jerome Powell said benchmark interest rates would likely go higher than anticipated due to stubborn inflation.
The Dow Jones closed at 32,856.46, losing 574.98 points or 1.72 percent. The S&P 500 ended at 3,986.37, falling by 62.05 points or 1.53 percent. Meanwhile, the tech-focused Nasdaq concluded the trading session at 11,530.33, declining 145.41 points or 1.25 percent. All three major indexes also opened the trading session lower.
Tuesday's loss brought the Dow Jones into the red territory for the year, going down by about 0.9 percent. The S&P 500 and the Nasdaq were still in positive territory for 2023, gaining 3.8 percent and 10.2 percent, respectively.
However, the selloff on Tuesday was the biggest fall for the S&P 500 in two weeks, bringing the index down below the key 4,000 level. The S&P 500 also broke its 50-day moving average, which often indicates that stocks are breaking recent trends.
Bank shares were the worst performers of the day as recession fears heightened due to the expectation of further monetary tightening by the Fed. Wells Fargo was down 4.7 percent. Meanwhile, shares of Bank of America, JPMorgan Chase and Goldman Sachs declined by around three percent each.
Mega-cap tech companies also struggled during Tuesday's trading session. Apple lost 1.45 points to 151.60, Google parent Alphabet was down 1.34 percent to 93.86 and Microsoft fell by 1.06 percent to 254.15.
Airline stocks, however, slightly boosted the equity market after the U.S. Department of Justice filed a lawsuit to prevent JetBlue's Spirit Airlines acquisition. Shares of United Airlines increased by three percent. American Airlines and Delta also gained 1.5 percent and 1.6 percent, respectively.
As previously mentioned, Powell's remarks about higher interest rates triggered selloffs in the stock market as investors chose to redirect their funds to other investment instruments. For instance, the two-year Treasury yields jumped to over five percent on Tuesday, its highest since 2007.
Analysts explained that Powell delivered two messages while speaking before the Senate Banking Committee — higher interest rates than central bank officials' projection in December and at a faster tightening pace. The chairman explained that recent data showed inflation stayed stubbornly high, prompting the Fed to tighten its monetary policy further.
The market now expects the U.S. central bank's terminal federal funds rate to range from 5.5 to 5.75 percent by September. Additionally, financial firm CME Group reported that 69 percent of investors predicted a 50-basis-point increase in the next rate-setting meeting — a faster-tightening pace from the 25-basis-point hike the Fed implemented in January.
The equity market started this year strongly, with all major Wall Street indexes recording monthly gains in January. Experts said the market at that time expected that the Fed would soon perform a policy pivot due to signs of cooling inflation.
“This isn’t surprising news, but it’s a tough reminder for markets after such a brisk rally.”
Callie Cox, U.S. Investment Analyst at eToro
EToro U.S. investment analyst Callie Cox said Powell's remarks were not "surprising," but it was "tough" for investors after the market's rally.
"The Fed's top priority is getting inflation down, and for good reason," Cox added. "People are starting to factor in persistently higher inflation, which could be the worst-case scenario for long-term investors and run the risk of prices spiraling higher."
New key inflation data
The U.S. Department of Labor will publish the job report for February this Friday. Economists have predicted that the U.S. added 225,000 payrolls last month. Although the February estimate is lower than the number of added payrolls in January, experts said it would not reverse the strong job report from January.
In January, the U.S. added around 517,000 payrolls. Additionally, the unemployment rate went down to 3.4 percent, the lowest level in over five decades. Experts said the strong job market could cause price hikes as wages increased.