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| Photo Credit: AP. |
(AP) - Stocks tumbled worldwide Friday on more signs the global economy is weakening, just as central banks raise the pressure even more with additional interest rate hikes.
The S&P
500 fell 2.2% in early afternoon trading, adding a dismal cap on what’s already
been a rough week. It’s almost all the way back to its lowest point of the
year, reached in mid-June, as Wall Street remains mired in its bear market. The
Dow Jones Industrial Average is nearly 20% below its record set early this
year. If it closes at or below that level, it would join other major indexes
that already passed the threshold.
European
stocks fell just as sharply or more after preliminary data there suggested
business activity had its worst monthly contraction since the start of 2021.
Adding to the pressure was a new plan announced in London to cut taxes, which
sent U.K. yields soaring because it could ultimately force its central bank to
raise rates even more sharply.
The Federal
Reserve and other central banks around the world aggressively hiked interest
rates this week in hopes of undercutting high inflation, with more big
increases promised for the future. But such moves also put the brakes on their
economies, threatening recessions as growth slows worldwide. Besides Friday’s
discouraging data on European business activity, a separate report suggested
U.S. activity is also still shrinking, though not quite as badly as in earlier
months.
“Financial markets are now fully absorbing the
Fed’s harsh message that there will be no retreat from the inflation fight,”
Douglas Porter, chief economist at BMO Capital Markets.
Crude oil
prices tumbled to their lowest levels since early this year on worries that a
weaker global economy will burn less fuel. Cryptocurrency prices also fell
sharply because higher interest rates tend to hit hardest the investments that
look the priciest or the most risky.
Even gold
fell in the worldwide rout, as bonds paying higher yields make investments that
pay no interest look less attractive. Meanwhile the U.S. dollar has been moving
sharply higher against other currencies. That can hurt profits for U.S.
companies with lots of overseas business, as well as put a financial squeeze on
much of the developing world.
The Dow
Jones Industrial Average fell 602 points, or 2%, to 29,489 and the Nasdaq fell
2.1% as of 12:05 p.m. Eastern. Smaller company stocks did even worse. The
Russell 2000 fell 3%. U.S. crude oil prices slipped 6.1% and weighed heavily on
energy stocks.
The Federal
Reserve on Wednesday lifted its benchmark rate, which affects many consumer and
business loans, to a range of 3% to 3.25%. It was at virtually zero at the
start of the year. The Fed also released a forecast suggesting its benchmark
rate could be 4.4% by the year’s end, a full point higher than envisioned in
June.
Treasury
yields have climbed to multiyear highs as interest rates rise. The yield on the
2-year Treasury, which tends to follow expectations for Federal Reserve action,
rose to 4.20% from 4.12% late Thursday. It is trading at its highest level
since 2007. The yield on the 10-year Treasury, which influences mortgage rates,
slipped to 3.68% from 3.71%.
The higher
rates mean Goldman Sachs strategists say a majority of their clients now see a
“hard landing” that pulls the economy sharply lower as inevitable. The question
for them is just on the timing, magnitude and length of a potential recession.
Higher
interest rates hurt all kinds of investments, but stocks could stay steady as
long as corporate profits grow strongly. The problem is that many analyst are
beginning to cut their forecasts for upcoming earnings because of higher rates
and worries about a possible recession.
In the U.S.,
the jobs market has remained remarkably solid, and many analysts think the
economy grew in the summer quarter after shrinking in the first six months of
the year. But the encouraging signs also suggest the Fed may have to jack rates
even higher to get the cooling needed to bring down inflation.
Some key
areas of the economy are already weakening. Mortgage rates have reached 14-year
highs, causing sales of existing homes to drop 20% in the past year. But other
areas that do best when rates are low are also hurting.
In Europe,
meanwhile, the already fragile economy is dealing with the effects of war on
its eastern front following Russia’s invasion of Ukraine. The European Central
Bank is hiking its key interest rate to combat inflation even as the region’s
economy is already expected to plunge into a recession. And in Asia, China’s
economy is contending with still-strict measures meant to limit COVID infections
that also hurt businesses.
While
Friday’s economic reports were discouraging, few on Wall Street saw them as
enough to convince the Fed and other central banks to soften their stance on
raising rates. So they just reinforced the fear that rates will keep rising in
the face of already slowing economies.
Economics
Writer Christopher Rugaber and Business Writers Joe McDonald and Matt Ott
contributed to this report.