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Stocks fell again on Wall Street on Friday, capping the worst weekly drop for the S&P 500 since the start of the pandemic.
Investors are increasingly concerned about rising inflation and how aggressive the Federal Reserve might be to cut interest rates. Historically low rates have helped support the broader market as the economy took a sharp hit from the pandemic in 2020 and then rebounded over the past two years.
The S&P 500 fell 84.79 points, or 1.9%, to 4,397.94. The benchmark index fell for three consecutive weeks to start the year. It’s down 5.7% this week, the worst weekly drop since March 2020 when the pandemic sent stocks into a bear market.
The Dow Jones Industrial Average fell 450.02 points, or 1.3%, to 34,265.37 for the third week in a row.
The tech-heavy Nasdaq fell 385.10, or 2.7%, to 13,768.92. Shares of expensive tech companies and other expensive growth stocks looked relatively less attractive as investors expected the Fed to start raising rates immediately at its March policy meeting. The index has fallen for four weeks in a row and is now more than 10% below its latest level and what Wall Street sees as a market correction. The Nasdaq fell 14.3% from the record low set on November 19.
“As always, when volatility kicks in, investors continue to worsen downside volatility,” said Nancy Tengler, CEO of Laffer Tengler Investments.
Technology and communications shares were among the biggest drops in the market on Friday. Video streaming service Netflix fell 21.8% after posting disappointing subscriber growth for another quarter. Disney, which is also trying to grow its subscriber base for its streaming service, fell 6.9%.
Treasury yields fell sharply as investors turned to safer investments. The 10-year Treasury yield fell to 1.76% from 1.83% on Thursday. The decline weighed heavily on bank stocks, which rely on higher yields to charge more profitable interest on loans. Wells Fargo fell 2.4% and Bank of New York Mellon fell 4.6%.
Fears of inflation and concerns about the impact of higher interest rates led to a shift in the broader market after a solid earnings year in 2021. Tech stocks and consumer-focused companies fell out of favor. Energy is the only S&P 500 sector to show gains; Home appliance manufacturers and utilities, typically considered less risky investments, did better than the rest of the market.
Supply chain problems and higher raw material costs have prompted companies in a wide variety of industries to raise their finished product prices. Many of these companies have warned investors that their profit margins and operations continue to feel squeezed into 2022.
Rising costs have raised concerns that consumers will begin to streamline spending due to the constant pressure on their wallets. The government’s December retail sales data showed an unexpected drop in spending.
The Fed is expected to raise interest rates sooner and more often than previously signaled to combat rising inflation that threatens to derail further economic recovery. The Fed’s short-term benchmark interest rate is currently in the 0% to 0.25% range. Investors now see a nearly 70% chance that the Fed will raise the rate by at least one percentage point by the end of the year, according to CME Group’s Fed Monitor tool.
“The market is working by digesting how much monetary policy change will happen through 2022,” said Bill Northey, senior investment director at US Bank Wealth Management.
Investors will be watching closely as Fed officials meet for their final policy meeting next week. Some economists are concerned that the central bank is moving slowly to fight inflation. Consumer prices rose 7% year-on-year in December, the largest increase in nearly four decades.
“In our view, the biggest near-term risk is right ahead: The Fed needs to stay seriously behind the curve and get serious about tackling inflation,” economists at BofA Global Research, led by Ethan Harris, said in a report. “It’s been a long time since markets have had to deal with the Fed, which is struggling with serious inflation,” he said.
Investors are also busy reviewing the latest round of corporate earnings, which can provide a better idea of how companies are dealing with persistent supply chain issues and higher costs.
Paint and coatings manufacturer PPG Industries fell 3.1% after warning investors that it continues to grapple with high raw material costs and supply chain issues. Surgical device maker Intuitive Surgical fell 7.9% after warning that a focus on COVID-19 cases was causing delays in performing other procedures.
The peloton rose 11.7% after the exercise bike and treadmill maker said its second-quarter fiscal revenue would meet previous estimates. Stock fell a day ago after CNBC reported that Peloton was temporarily halting production of exercise equipment to stem the drop in sales.
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