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 2.3% 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 on pace to finish the day 20% below its record set early this year, joining 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.
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 585 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 released a forecast showing it expects that benchmark rate to be 4.4% by the year’s end, a full point higher than envisioned in June.
Treasury yields, which affect rates on mortgages and other kinds of loans, 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, rose to 3.73% from 3.71%.
The higher rates mean Goldman Sachs strategists say a majority of their clients are now see a “hard landing” that pulls the economy sharply lower as inevitable. The question now 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 analysts are beginning to cut their forecasts for upcoming earnings in part because of the higher interest rates. To be sure, investors say the outlook for everything from inflation to interest rates to profits looks even murkier than usual.
Business writers Joe McDonald and Matt Ott contributed to this report.