Dow drops more than 500 points
US stocks retreated on Friday, as traders looked suspiciously at the Federal Reserve for clues to the direction of monetary policy.
The Dow Jones Industrial Average had its worst week since the week ended October 30. The blue-chip stock index on Friday fell 1.6%, or 533.37 points, to 33,290.08. For the week, he lost 3.45%.
The S&P 500 lost 1.3%, or 55.41 points, to 4,166.45 on Friday, losing 1.9% on the week. This broke a three week streak of gains. The Nasdaq Composite lost 0.9%, or 130.97 points, to 14,030.38, as major tech stocks also fell. For the week, it was down 0.3%.
Policymakers had signaled on Wednesday that they planned to hike interest rates by the end of 2023, earlier than previously expected. Sentiment waned again on Friday after Federal Reserve Bank of St. Louis chief James Bullard told CNBC he expected the first rate hike even earlier, at the end of 2022.
The Fed has faced more inflation than expected, and policymakers need to be nimble, he added. But it will take several Fed meetings to organize the debate on reducing its bond buying program, he said.
Mr Bullard does not currently have a vote on the FOMC, and he was the first official to speak after last week’s meeting. Seven of the 18 Fed officials expect one or more increases next year.
It’s no surprise that stocks are falling, said Fawad Razaqzada, analyst at ThinkMarkets. US stocks have hit a series of records and outpaced the economic recovery since last year. Now traders are reassessing this “stimulus trade” as they watch the Federal Reserve slowly begin to shift its stance on monetary policy.
“It used to happen,” he said. “This kind of massive sell-off was happening because the market got carried away.”
The Cboe volatility index, known as Wall Street’s “fear gauge”, hit its highest level in weeks.
“Markets will be more frightened by 2022 when they turn to a rate hike because that will mean they will have to fall as well,” said Derek Halpenny, research manager for global markets in the European region at MUFG Bank.
In bond markets, the yield on the 10-year Treasury bill fell to 1.449% on Friday, from 1.509% on Thursday. The 10-year rate has fallen for five consecutive weeks; yields fall when prices rise.
Traders said a rush of options activity amplified the market’s fall. Many investors had recently turned to writing options, betting that stocks would continue to climb and contributing to the relative calm of the markets in recent weeks. It also led to a constant build-up of options that were due to expire on Friday, potentially exacerbating stock market movements.
More than 116 million options contracts were due to expire on Friday, according to data from Cboe Global Markets, the second highest level on record.
Signals from the Fed on Wednesday had already started to slow a recent rally in stocks linked to a broad economic recovery, leading to a pullback in banking and energy stocks this week.
“If the Fed cuts bond purchases and raises rates, then all of a sudden the inflation dragon is tamed,” said Gregory Perdon, co-chief investment officer of private bank Arbuthnot Latham..
Some investors are also posting profits after a strong multi-month rally that left the S&P 500 just below its record close on Monday.
All 11 sectors of the S&P 500 fell on Friday, as energy, financials and utilities all fell more than 2%. Consumer staples, materials and real estate all fell 1.5% or more.
“Since many investors are sitting on huge gains, the temptation is to reduce risk,” said Luca Paolini, chief strategist at Pictet Asset Management. “When you combine costly assessments and changes in Fed policy, it’s best to lock in the gains.”
But Mr Perdon said stocks are expected to rise further. .
“The Fed hasn’t done anything yet. All they’ve done is report, and they’re nowhere near doing anything, ”Mr. Perdon said. “The markets are supported by the trio of monetary and fiscal policy and the deployment of the vaccine. Markets may face a calculation, but that won’t happen in 2021. ”
Lumber prices, which soared earlier in the pandemic, fell 0.8% on Friday, continuing a week-long sell-off. Prices fell about 15% this week, their eighth worst week since 1984.
The selling pressure that has hit tech stocks, T-bills and cryptocurrencies at various times over the past few months has so far not affected major stock indexes, but that could change, Michael said. Gayed, portfolio manager at ATAC Funds who writes the Late Overdue Report Newsletter.
“Everyone has gone too far with the risk and stimulus thesis,” he said, “and everyone forgot to be careful. “
Gold futures fell 0.3%, adding to their losses on Thursday, when they suffered their biggest drop in more than 10 months. For the week, gold fell 5.8%, its worst one-week performance since the week ended March 13, 2020. The price of the precious metal tends to drop when investors anticipate higher rates and investments yield carriers becoming more attractive.
Overseas, the pancontinental Stoxx Europe 600 index fell 1.6% to 452.05.
The main Asian indices closed on a mixed note. Hong Kong’s Hang Seng index rose nearly 0.9% to 28,801.27 and South Korea’s Kospi Composite index rose 0.1% to 3,267.93. Japan’s Nikkei 225 closed down 0.2% at 28,964.08 and China’s Shanghai Composite was relatively flat.
The week on the markets
WSJ Analysis of Recent Stock and Bond Movements, Selected by Editors
Corrections and amplifications
The Dow Jones posted its worst weekly performance since October. An earlier version of this article and the accompanying headline incorrectly stated that the Dow Jones had its worst weekly performance since January. (Corrected June 18)
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