Despite rallying in the previous trading session, Wall Street slumped on Thursday as economic data heightened fears that the Federal Reserve would maintain high interest rates for longer.
The Dow closed at 32,922.25, falling by 454.23 points or 1.36 percent. The index for the top 500 American companies, the S&P 500, ended the session at 3,807.89, falling by 70.55 points or 1.82 percent. Meanwhile, NASDAQ Composite closed at 10,436.37, losing 273.00 points or 2.55 percent.
The S&P index is currently on track to shed nearly 19 percent by the end of 2022. MSCI’s world index — which tracks shares in various global developed economies — is expected to post an annual loss after falling eight months out of 12.
U.S. government bonds, on the other hand, rose late Wednesday. The 10-year notes rose from 3.684 percent to 3.6526 percent. At the same time, the 30-year notes rose to 3.7288 percent from 3.744 in the previous session.
The U.S. dollar also gained momentum as many investors withdrew from riskier assets, with the dollar index rising 0.22 percent — the index is expected to fall by two percent this month.
The euro was down 0.04 percent against the greenback to trade at $1.0599. The sterling was also down 0.46 to $1.2027. However, the yen continued to strengthen against the U.S. currency, gaining 0.19 percent to trade at 132.26 per dollar.
The pessimistic market
Pictet Asset Management head strategist Luca Paolini explained that regardless of the rallies that had happened several times on Wall Street, the market was still bearish.
"You get the odd short rally and then it goes flat,” Paolini said. “There is very low conviction. The only conviction is that there is going to be a recession."
Analysts said investors had become more pessimistic that the stock market would rally in the last few days of 2022. Investors are instead preparing to close the trading year with an acknowledgment that it was the worst year for the market since the Great Recession in 2008.
GLOBALT Investments portfolio manager Keith Buchanan said this trading year was different from 2008. Buchanan said this year, people had “nowhere to hide” and that the economic impact was more widespread. It led to a higher sense of desperation among investors.
Before the trading session on Thursday began, data released showed an upward revision of GDP and lower-than-expected unemployment claims. The new finding contradicted earlier data which showed that the inflation pace had slowed down.
While earlier investors expected the U.S. central bank to make a policy pivot in the coming months, signs that the inflation remained high might make the Fed maintain its hawkish policy longer with the higher federal funds rate by the end of the tightening cycle.
Economists said the prolonged tight policy might cause the economy to contract, leading to a recession next year. Buchanan, however, said that the stock market would likely have a better year than the overall economy in 2023.
The Fed began its tightening cycle in March this year, raising the interest rates in every rate-setting meeting since then. Currently, the federal funds rate ranges from 4.25 to 4.50 percent. Higher benchmark rates affect the borrowing costs in the U.S.
Commodity market
Like the stock market, the new inflation data also affected the commodity market. The market posted gains earlier in the day before reversing.
The U.S. crude oil was down 0.72 percent to $77.73 a barrel, while Brent fell 0.6 percent to $81.71 a barrel. Previously, oil prices rallied after news that a snowstorm might decrease the crude stockpiles.
Due to the rising dollar, the gold price dropped. Spot gold fell one percent to $1,795.23 an ounce.