U.S. stocks suffer another week of losses, Dow ends lowest since November 2020 as bond yields hammer equities after Fed rate hike

U.S. stocks closed sharply lower Friday, with the Dow Jones Industrial Average ending at its lowest closing value since November 2020. All three major benchmarks suffered another week of losses as bond yields rose in the wake of the Federal Reserve’s interest rate hike on Wednesday.

For the week, the Dow dropped 4% while the S&P 500 slid 4.6% and the Nasdaq tumbled 5.1%, according to Dow Jones Market Data. All three major indexes declined for a second straight week.

What drove markets

U.S. stocks fell sharply Friday as market volatility climbed in the wake of the Federal Reserve delivering a third straight, jumbo interest-rate hike of three quarters of a percentage point on Wednesday.

“Recession risks have increased and no one wants to be the last one out squeezing out through the door,” said Russell Evans, managing principal and chief investment officer at Avitas Wealth Management, in a phone interview Friday. “The market is rushing to get ahead of what the market sees as being inevitable.”

Investors are worried that the prospect of a so-called soft landing for the U.S. economy is diminishing as the central bank keeps up its aggressive pace of tightening monetary policy in an effort to fight high inflation. After on Wednesday announcing its latest large rate hike, Fed Chair Jerome Powell warned again that its job is not done.

“People interpreted this week’s action and rhetoric as more hawkish,” said Evans.

The S&P 500 finished Friday up 0.7% from its 2022 closing low of 3666.77 on June 16, while the Dow carved out a new trough this year by ending at its lowest closing value since Nov. 20, 2020, according to Dow Jones Market Data.

See: Fed will tolerate a recession, and 5 other things we learned from Powell’s press conference

Treasury yields have surged since the Fed’s policy rate decision was announced Wednesday, putting pressure on the stock market.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.687%
dipped one basis point Friday to end at 3.695%, after surging Thursday to its highest rate since February 2011 based on 3 p.m. Eastern time levels, according to Dow Jones Market Data.

Meanwhile, the 2-year Treasury yield
TMUBMUSD02Y,
4.211%
climbed 8.8 basis points Friday to 4.212%, to its highest level since Oct. 12, 2007.

“The price action has been really, really chaotic this entire week, and it’s mostly been driven, in my view, by the bond market,” said Mike Antonelli, a market strategist at Baird.

But it’s not just the Fed that’s spooking markets. A host of other global central banks have also hiked interest rates this week. U.S. equity traders are paying particularly close attention to the U.K., where markets have been roiled by the latest hike from the Bank of England.

See: Bond yields spike, pound slides to 37-year low as U.K. unveils deficit-funded tax cuts that spark investor worries

“We’ve got new tax cuts in the U.K., which might prompt even more rate hikes from the Bank of England,” said Jeff Kleintop, chief global investment strategist at Charles Schwab, in a phone interview Friday.

“The U.K. tax cuts are likely to pump more money into the economy, which is likely to create more demand and further fuel inflation,” said Kleintop. That in turn, may prompt the Bank of England to hike rates even higher at a time when investors are worried that the tightening of monetary policy by central banks is increasing the risks of a global recession, he said.

One of the biggest challenges facing markets right now is the rise in real rates — that is, Treasury yields minus the break-even inflation rate from inflation-protected bonds. Real rates have risen sharply over the past six weeks as investors reacted to factors including data showing surprisingly strong inflation in August.

“Because of the discount effect, higher real rates are lowering the equity risk premium, and that’s the big challenge for the market,” said Brad Conger, deputy chief investment officer at Hirtle, Callaghan & Co.

If there’s a silver lining for markets at this point, it’s that stocks and bonds are looking a little oversold here as a lot of bad news — including a terminal fed-funds rate north of 4.5% — has already been priced in, Conger said. “If there’s any marginal good news…it could rocket us higher,” he added.

On the economic data front, readings from the flash S&P Global U.S. purchasing managers indexes for both the manufacturing and services sectors helped push the composite PMI to 49.3 in September, outperforming FactSet’s consensus number.

It’s still a “soft reading,” said Charles Schwab’s Kleintop. “It would still suggest the risk of a mild contraction for third-quarter GDP.”

The energy sector
SP500.10,
-6.75%
was the hardest hit among the S&P 500’s sectors in Friday’s slump, suffering a drop of around 6.75% as U.S. oil prices fell below $80 a barrel, according to FactSet data. Consumer discretionary
SP500.25,
-2.29%
shares were also badly bruised, falling 2.3%.

Meanwhile, the market is “very likely to see downward guidance” in the coming earnings season for the third quarter after seeing resilience in company earnings growth this year, according to Kleintop. “That may be one last support for the market that might begin to deteriorate,” he cautioned.

Avitas Wealth Management’s Evans says he’s recently been looking for buying opportunities in the stock-market carnage. “I’ve been adding some technology stocks, but very big established technology stocks,” he said.

Companies in focus
  • Costco Wholesale Corp.
    COST,
    -4.26%
    shares dropped 4.3% after delivering Q4 results late Thursday. The wholesale retailer said it’s seeing higher freight and labor costs and reported operating margins slightly below consensus expectations.

  • Shares of Chevron Corp.
    CVX,
    -6.53%
    tumbled 6.5% and Boeing Co.
    BA,
    -5.37%
    fell 5.4%, dragging down the Dow as two of the worst performers in the index Friday.

  • FedEx Corp.
    FDX,
    -3.37%
    shares slid 3.4% after the company announced cost cuts and increases in shipping rates one week after withdrawing its outlook, which had caused its shares to tank and even hurt stocks more broadly.

—Steve Goldstein contributed to this report.

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