Major stock indices on Wall Street plummeted on Thursday as fear of recession heightened among investors following the most recent interest rate hike by the Federal Reserve.
The Dow Jones closed at 33,202.22, dropping by 764.13 points or 2.25 percent. The S&P 500 — which tracks stocks of top 500 companies in the U.S. — concluded the trading session at 3,895.75, losing 99.57 points or 2.49 percent. The NASDAQ Composite closed at 10,810.53, falling 360.36 points or 3.23 percent. Declines in the three indices were the largest in weeks.
All S&P sectors traded in the red, posting seven new lows against two 52-week highs. The communication services and technology sectors were the worst performers in the trading session, dropping nearly four percent each.
The shares of streaming service Netflix went down 8.63 percent after news reported that the company would return advertisers’ money for failing to hit viewership targets. Nvidia’s stock also dropped by 4.09 percent after HSBC Global Research lowered its stock rating.
On Wednesday, the Fed raised benchmark interest rates by half a percentage point, which was lower than 75 basis points increases in the previous four FOMC meetings. Despite the smaller rate hike, Fed chairman Jerome Powell said the recent inflation data were insufficient to convince the central bank to stop its monetary tightening cycle anytime soon.
Fed officials predicted that in 2023, the federal fund rate would be more than five percent. Analysts have said the high benchmark rates would likely stay for a while before the central bank started to lower them to the initial level. At its current 4.25 to 4.5 range, the interest rates today are comparable to the ones during the 2007 financial crisis.
"That is what is a concern for the market, that the Fed is going to overreach,"
Quincy Krosby, head global strategist at LPL Financial
LPL Financial head global strategist Quincy Krosby said the market was worried that the U.S. central bank would “overreach” before hitting its two percent target. Qontigo global chief of applied research Melissa Brown also claimed that the market sensed the Fed’s persistent worry about inflation, which indicated that the rate increases would not end soon.
"It really is hard to see what is going to turn things back around until we start seeing more data - which could be earnings, which could be the next inflation print or the Fed statement next year,” Brown added. “The good news is it’s almost next year."
"It is not just what they did but what they said, and it certainly does seem like they are still worried about inflation and this is not going to be the end of the rate increases,"
Melissa Brown, global chief of applied research at Qontigo
In the previous weeks, the equity market rallied and achieved significant growth across major indices. Starting in December, the rallies fizzled since the inflation data showed mixed results, and the Fed did not disclose any plan to loosen its policy. Investors expect the central bank to raise the interest rates by 25 basis points in the first FOMC meeting next year.
On Thursday, retail data showed a sharper-than-expected decline in sales in November. Unemployment claims, on the other hand, fell last week. This resilient labor market situation may lead to wage inflation, further increasing inflation in the coming months.
Interest rates in Europe, England
Like the Fed, the European Central Bank (ECB) and the Bank of England (BoE) also implement benchmark interest rate hikes to manage inflation. On Thursday, both central banks indicated they would extend the tightening cycle into 2023.
The pace of inflation in the U.K. declined slightly in November to 10.7 percent, while inflation in the eurozone dropped to 10 percent. Food and energy costs are the main drivers for price increases since the Ukraine War disrupted the supply chain in Europe. The situation worsens as Russia limits its energy supply to Europe after facing criticisms and embargos for its attack on Ukraine.
The STOXX Europe 600 plunged 12.60 points or 2.85 percent, closing at 429.91.