BEIJING — Shares fell sharply worldwide on Friday on concerns that an already slowing global economy could slide into recession as central banks ramp up pressure with additional rate hikes.
The Dow Jones Industrial Average fell 1.6%, closing at its lowest level since late 2020. The S&P500 fell 1.7%, close to the mid-June 2022 low, while the Nasdaq fell 1.8%.
The sale ended another rough week on Wall Street, with the major indices trailing their fifth weekly loss in six weeks.
Energy prices closed sharply lower as traders worried about a potential recession. Government bond yields, which affect rates on mortgages and other loan types, remained at multi-year highs.
European equities fell just as sharply or more after preliminary data suggested business activity experienced its worst monthly contraction since early 2021. The pressure was compounded by a new plan announced in London to cut taxes, which caused UK interest rates to rise as it could eventually force its central bank to raise interest rates even sharper.
The Federal Reserve and other central banks around the world have aggressively raised interest rates this week in hopes of undermining high inflation, and promised even bigger hikes going forward. Such measures naturally turn economies off, in hopes that slower purchases by households and businesses will ease inflationary pressures. But they also threaten a recession if they rise too far or too quickly.
In addition to Friday’s discouraging data on European business activity, a separate report suggested that US activity is also still contracting, although not as much as in previous months.
“Financial markets are now fully absorbing the Fed’s harsh message that there will be no pullback from the inflation battle,” Douglas Porter, chief economist at BMO Capital Markets, wrote in a research report.
The price of crude oil in the US fell 5.7% to its lowest level since early this year on concerns that a weaker global economy will use less fuel. Cryptocurrency prices also fell sharply as higher interest rates hit the investments that look the most expensive or riskiest.
Even gold fell into global defeat, as bonds that pay higher yields make investments without interest look less attractive. Meanwhile, the US dollar has risen sharply against other currencies. That could hurt the profits of US companies with many overseas activities, and put pressure on much of the developing world.
the S&P 500 fell 64.76 points to 3,693.23, the fourth decline in a row. The Dow, which dropped more than 800 points at one point, lost 486.27 points and closed at 29,590.41. The Nasdaq fell 198.88 points to 10,867.93.
Shares of smaller companies fared even worse. The 2000 Russell fell 42.72 points, or 2.5%, to close at 1,679.59.
More than 85% of the shares in the S&P 500 closed in the red, with tech companies, retailers and banks among the largest weights on the benchmark index.
The Federal Reserve raised its benchmark interest rate, which affects many consumer and business loans, to a range of 3% to 3.25% on Wednesday. It was close to zero at the start of the year. The Fed also released a forecast suggesting that its benchmark rate could reach 4.4% by the end of the year, a full point higher than expected in June.
Government bond yields have risen to their highest level in several years as interest rates rise. The yield on the 2-year Treasury, which follows expectations for the Federal Reserve’s performance, rose to 4.20% from 4.12% at the end of Thursday. It is at the highest level since 2007. The 10-year Treasury yield, which affects mortgage rates, fell from 3.71% to 3.69%.
Goldman Sachs strategists say a majority of their clients now see a “hard landing” that will drag the economy sharply down as inevitable. The question for them is only the timing, extent and duration of a potential recession.
Higher interest rates hurt all types of investments, but stocks can remain stable as long as corporate earnings grow strongly. The problem is that many analysts are beginning to lower their forecasts for upcoming earnings due to higher interest rates and concerns about a potential recession.
“Increasingly, market psychology has moved from concerns about inflation to concerns that corporate profits will at least fall if economic growth slows down,” said Quincy Krosby, chief global strategist for LPL Financial.
In the US, the job market has remained remarkably solid and many analysts believe the economy grew in the summer quarter after contracting in the first six months of the year. But the encouraging signs also indicate that the Fed may need to raise interest rates even higher to provide the necessary cooling to bring inflation back.
Some key areas of the economy are already weakening. Mortgage rates have reached a 14-year high, causing sales of existing homes to fall by 20% in the past year. But other areas that perform best when rates are low hurt too.
In Europe, the already fragile economy is meanwhile dealing with the consequences of the war on the eastern front after the Russian invasion of Ukraine. The European Central Bank is raising its key interest rate to fight inflation, while the region’s economy is already expected to plunge into recession. And in Asia, the Chinese economy is still struggling with strict measures designed to contain COVID infections that also harm businesses.
While Friday’s economic reports were discouraging, few on Wall Street saw them enough to convince the Fed and other central banks to soften their stance on raising rates. So they only reinforced fears that rates will continue to rise in the face of already slowing economies.
Economics writer Christopher Rugaber and business writers Joe McDonald and Matt Ott contributed to this report.