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Wednesday September 28th, 2022 12:05PM

Wall Street stumbles 3.3% as fears of a recession grow

By The Associated Press
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NEW YORK (AP) — Stocks slumped again on Wall Street Thursday, erasing another 3.3% from the S&P 500 and bringing the index 23.6% below the peak it reached in January. The renewed selling came a day after a brief reprieve for markets when the Federal Reserve delivered a huge interest rate increase in its effort to fight back inflation. Markets are worried that the Fed and other central banks may stumble along the narrow path of hiking interest rates enough to slow high inflation but not so much that they cause a recession. The Dow fell 2.4% and the Nasdaq gave back 4.1%. Treasury yields fell.

THIS IS A BREAKING NEWS UPDATE. AP’s earlier story follows below.

NEW YORK (AP) — Markets worldwide are back to tumbling on Thursday, and a wipeout on Wall Street has stocks down nearly 4% as worries about a fragile economy roar back to the fore.

The S&P 500 was 3.9% lower in afternoon trading, more than reversing its blip of a 1.5% rally from a day before. Analysts had warned of more big swings given deep uncertainties about whether the Federal Reserve and other central banks can tiptoe the narrow path of hiking interest rates enough to get inflation under control but not so much that they cause a recession.

The Dow Jones Industrial Average was down 911 points, or 3%, at 29,757, as of 2:50 p.m. Eastern time, and the Nasdaq composite was 4.7% lower. The S&P 500 was on track for its sixth loss in the last seven days, and all but eight of the 500 companies in the index were lower.

Wall Street fell with stocks across Europe after central banks there followed up on the Federal Reserve’s interest-rate hike on Wednesday. The Bank of England raised its key rate for the fifth time since December, though it opted for a more modest increase of 0.25 percentage points than the 0.75-point hammer brought by the Fed.

Switzerland’s central bank, meanwhile, raised rates for the first time in years, a half-point hike. Taiwan’s central bank raised its key rate by an eighth of a point. Japan's central bank began a two-day meeting, though it's held out on raising rates and making other economy-slowing moves that investors call “hawkish.”

“The clear read-through here is the FOMC (Fed) has unleashed the central bank Hawkish Genie from the bottle, and we should expect more aggressive follow-through from other central banks except those who are economically challenged,” Stephen Innes of SPI Asset Management said in a commentary.

Such moves and expectations for plenty more have sent investments tumbling this year, from bonds to bitcoin. Higher interest rates slow the economy by design, in hopes of stamping out inflation. But they’re a blunt tool that can choke off the economy if used too aggressively.

"Another concern is that with the change in policy, there's been weakening economic data already," said Bill Northey, senior investment director at U.S. Bank Wealth Management. “That raises the odds of a recession in the latter part of 2022 into 2023.”

The worries dragged the S&P 500 into a bear market earlier this week, meaning it had dropped more than 20% from its peak. It's now roughly 24% below its record set early this year and back to where it was in late 2020. That effectively erases 2021, which was one of the best years for Wall Street since the turn of the millennium.

Not only is the Federal Reserve hiking short-term rates, it also this month began allowing some of the trillions of dollars of bonds it purchased through the pandemic to roll off its balance sheet. That should put upward pressure on longer-term interest rates. It’s another way central banks have been ripping away supports they earlier propped underneath markets to juice the economy.

The U.S. economy is still largely holding up, driven in particular by a strong jobs market. Fewer workers filed for unemployment benefits last week than a week before, a report showed on Thursday. But more signs of trouble have been emerging.

On Thursday, one report showed homebuilders broke ground on fewer homes last month. Rising mortgage rates resulting directly from the Fed’s moves are digging into the industry. A separate reading on manufacturing in the mid-Atlantic region also unexpectedly fell.

“Corporate earnings estimates have not yet changed to reflect some of the softening economic data and that could lead to the second leg of this repricing,” Northey said.

Treasury yields were swinging on Thursday, with the 10-year yield down to 3.30% from 3.39% late Wednesday. It had climbed as high as 3.48% earlier in the morning, near its highest level since 2011.

Higher rates have been delivering the hardest hits to the investments that soared the most through the pandemic, benefiting from the easy, ultralow rates. That includes bitcoin and high-growth technology stocks.

Drops for Apple, Amazon, Tesla and other big tech-oriented stocks provided some of the heaviest weights on the S&P 500. Each fell at least 4%.

But the sharpest losses came for stocks whose profits depend more on the strength of the economy and whether customers can keep up their purchases amid the highest inflation in decades.

Cruise operator Royal Caribbean fell 11.5%, and Caesars Entertainment dropped 9.5%.

It's all a sharp turnaround from a day earlier, when stocks rallied immediately after the Fed's biggest hike to rates since 1994. Analysts said investors seemed to latch onto a comment from Fed Chair Jerome Powell, who said mega-hikes of three-quarters of a percentage point would not be common.

Powell said Wednesday the Fed is moving “expeditiously” to get rates closer to normal levels after last week’s stunning report that showed inflation at the consumer level unexpectedly accelerated last month, which dashed hopes that inflation may have already peaked.

The Fed is “not trying to induce a recession now, let’s be clear about that,” Powell said. He called Wednesday’s big increase “front-end loading.”

“Despite their assurance, it’s unclear to me whether the Fed has the tools they say they do to tamp down prices,” said Jason Brady, CEO of Thornburg Investment Management. He also said that even after its mega-hike on Wednesday, which was triple the usual amount, “the Fed is still behind.”

Even without recession, higher interest rates make investors less willing to pay high prices for investments, particularly those seen as the most expensive or the most risky.

Bitcoin has been threatening to drop to $20,000 after setting a record at nearly $69,000 late last year. It was at $21,028 in afternoon trading, down 2.3% over the last 24 hours, according to CoinDesk.

___

AP Business Writers Damian J. Troise and Yuri Kageyama contributed.

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