Stock markets drop as Wall Street takes a gloomy view of the economy
Stock markets continued their weeklong plunge on Friday, with all three major indices falling more than 1%, as investors who are losing faith in the global economy rushed for the exits.
Wall Street has been developing a gloomy view of the economy’s future, where a recession seems more likely, as it digests the Federal Reserve’s warnings about what it will take to cool the country’s overheated inflation.
The Dow fell more than 486 points, or 1.6%, to close at 29,590 on Friday, the lowest in nearly two years. The Dow was down 4% for the week, and also closed 19.59% from its most recent peak in January – bringing it right up to the demarcation line for bear markets of 20%.
The Nasdaq and the S&P 500 have now both entered into bear markets. The Nasdaq fell 1.8% to 10,868, or 32.3% below its most recent peak 10 months ago. The S&P dropped 1.72% to 3,693, down 23% from its January peak.
Stock markets, as well as those for bonds and commodities, have been reckoning with the Fed’s announcement this week that it will continue to raise interest rates until inflation is under control, regardless of the risks of a recession.
Already this year, the central bank has hiked rates at a speed and magnitude not seen for a generation, in the hopes of slowing down the worst inflation the country has experienced in 40 years.
Most Americans have hoped for a “soft landing,” where the Fed’s steps to stabilize prices would bring about only a slight economic decline. But Fed Chair Jerome Powell made it clear on Wednesday that the economy could experience the “hard landing” of a severe downturn.
“No one knows whether this process will lead to a recession or if so, how significant that recession would be,” Powell said at a news conference after the Fed announced it was raising interest rates by 0.75% for the third time in a row.
“Nonetheless, we’re committed to getting inflation back down to 2% because we think that a failure to restore price stability would mean far greater pain later on. “
Powell’s comments and a bleak outlook from FedEx, the multinational company heavily connected to the world’s supply chains, have created confusion about the future, with Goldman Sachs analyst David Kostin describing the economic outlook as “unusually murky.”
“The forward paths of inflation, economic growth, interest rates, earnings, and valuations are all in flux,” Kostin wrote on Friday.
“Based on our client discussions, a majority of equity investors have adopted the view that a hard landing scenario is inevitable and their focus is on the timing, magnitude, and duration of a potential recession and investment strategies for that outlook,” he also wrote.