Stocks fell on Thursday as investors refocused on the threat of runaway inflation and the economic difficulties that will arise when interest rates rise to levels not seen in more than a decade, resuming a trend descending that has already dragged Wall Street into a bear market.
The S&P 500 fell more than 3% by midday, part of a global pullback that saw stocks in Europe also post steep declines. With Thursday’s decline, the S&P 500 is now more than 23% below its Jan. 3 high and on course for its worst quarter since 2008, when the economy was devastated by the global financial crisis.
Europe’s Stoxx 600 index fell 2.5%, its seventh decline in eight days, while the FTSE 100 in London fell 3.1%.
Thursday’s fall came a day after the Federal Reserve announced its biggest rate hike in decades, a sign it was prepared to inflict economic hardship to tame inflation, followed by other central banks. The Bank of England announced its fifth consecutive interest rate hike on Thursday and the Swiss central bank raised its interest rate for the first time in 15 years, a more aggressive move than many expected.
Central banks are raising borrowing costs to discourage spending on everything from new homes to car loans, but it will also slow the economy and threaten corporate profits.
Already, some interest rates are rising much faster than even the Fed’s key rate, which is now in a range of 1.50% to 1.75% from near zero in March. Average mortgage rates, for example, have almost doubled this year, from just over 3% to around 5.8% on Thursday. That’s the highest level for 30-year fixed mortgages since 2008, according to Freddie Mac.
Shares of homebuilders, like KB Home and Lennar, fell as a result. They were down 8.5% and nearly 7% respectively on Thursday, losses that left them down more than 40% for the year so far.
And government bond yields, which underpin borrowing costs across the economy, are also rising sharply this year as the central bank raises rates. Earlier this week, before the Fed’s announcement, the yield on 10-year Treasuries climbed to 3.47%, the highest since 2011. On Thursday, it was 3.32%, still reflecting levels not seen for over a decade.
Analysts say the stock market is unlikely to regain its footing until there are clear signs that inflation is starting to get under control, which in turn would relieve the Fed from raising rates quickly. Stocks briefly rebounded in late May, ending a seven-week losing streak as data appeared to show consumer price gains had peaked, but selling resumed last week after a new consumer price index report showed inflation accelerating. again, jumping 8.6% in May from a year earlier.
“Creeping inflation could be a killer in the stock market,” said Edward Moya, senior market analyst at OANDA, noting that rising food, energy and housing prices are a burden on investors. businesses and consumers.
Fed Chairman Jerome H. Powell stressed at a press conference Wednesday that causing a recession was not part of the central bank’s plan, but economists are skeptical. Analysts at Deutsche Bank, for example, called the central bank “overly optimistic” in its belief that it could bring inflation under control without causing a recession.
“It is only when it is clear that the US has seen a spike in inflation that concerns about the path of Fed hikes should ease significantly,” wrote Jane Foley, strategist at Rabobank, in an email. “Meanwhile, market sentiment should remain marked.”
Revisions to economic forecasts are coming quickly. Economists at IHS Markit, for example, now say that US gross domestic product likely grew at an annual rate of 0.8% in the second quarter. Just last week, they were forecasting growth of 2.4%.
Worry about the economy was also evident outside the stock market on Thursday. Copper prices and oil prices, which historically serve as measures of sentiment toward the global economy, also fell on Thursday.