Shares fell on Friday, with the Dow Jones Industrial Average posting its worst weekly drop since October as traders feared the Federal Reserve might start rate hike earlier than expected.
The blue chip average fell 532 points, or 1.6%. The S&P 500 lost 1.3%. The Nasdaq Composite closed 0.9% lower. Economic comeback games led to the market losses.
For the week, the 30-share Dow was down 3.5%. The S&P 500 and Nasdaq lost 1.9% and 0.2% respectively this week.
St. Louis Federal Reserve President Jim Bullard told CNBC’s “Squawk Box” Friday that it was natural for the Fed to tend a little “hawkish” this week and that the central bank’s first rate hike likely in 2022 after the Fed on Wednesday added two rate hikes to its 2023 forecast and raised its inflation forecast for the year, which put stock prices under pressure.
“Some investors fear that if the Fed tightens policy earlier than expected to ease inflationary pressures, it could hurt future economic growth,” said Keith Lerner, chief market strategist, Truist Advisory Services. It is premature to give up the so-called value trade now.
Parts of the market most sensitive to the economic recovery sold off this week. The S&P 500 energy and industrials lost 5.2% and 3.8% respectively over the course of the week. Financial stocks and materials each lost more than 6%. These groups had been market leaders that year as the economy reopened.
The decline in stocks came when the Fed’s actions led to a drastic flattening of the so-called Treasury yield curve. This means that the yields of government bonds with shorter duration – like the 2-year bond – declined while the yields of longer durations like the 10-year benchmark. The decline in long-term bond yields reflects less optimism about economic growth, while the rise in short-end yields reflects expectations of a rate hike by the Fed.
This phenomenon hurt bank stocks in particular, as their earnings could plummet if the spread between short-term and long-term interest rates narrowed. Bank of America and JPMorgan Chase’s shares each lost more than 2% on Friday. Citigroup was down 1.8%, recording its 12th straight daily decline.
Fed chairman Jerome Powell said Wednesday that officials were talking about curbing bond purchases and would eventually begin slowing asset purchases.
“The first hint of a possible change in Fed policy this week was a reminder that emergency monetary policy conditions and the era of free money will eventually end,” MRB Partners strategists wrote in a note. “We expect a series of gradual withdrawals from the Fed’s favorable inflation outlook over the coming months.”
Commodity prices have been under pressure this week as China tried to cool rising prices and the US dollar strengthened. Copper, gold and platinum fell again on Friday.
Friday also coincided with the quarterly Quadruple Witching, when options and futures on indices and stocks expire. This event may have contributed to more volatile trading during the session.
– CNBC’s Fred Imbert contributed to this report.
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