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U.S. stocks plunged on Thursday, with the Dow Jones, S&P 500, and Nasdaq all dropping over 1%, as investors reacted negatively to indications from the Federal Reserve that interest rates will remain elevated for longer than expected.
The sell-off came a day after the Fed announced another 75 basis point rate hike but suggested rates could stay higher through 2023 and 2024 to combat stubborn inflation. This dashed hopes for any near-term pivot to an easier monetary policy.
Rising rate worries dragged down big tech stocks like Amazon, Nvidia, Apple, and Alphabet, as well as rate-sensitive sectors real estate and semiconductors. The tech-heavy Nasdaq fell 1.8% to its lowest level since June, with the Philadelphia Semiconductor Index sliding 1.8%.
“If you do have rates higher for longer, you have more strain on the system and more pressure on the economy,” said Thomas Martin of GLOBALT Investments. “It gives people another chance to say that the lag time of higher rates — which we’re just starting to feel — might really bite.”
The Fed’s updated projections point to the key fed funds rate rising to 4.4% by year’s end, then topping out above 5% in 2023 before falling to 4.6% in 2024. This is a more aggressive path than forecast in June.
An unexpected drop in jobless claims to 193,000, the lowest since April, further convinced the Fed the economy remains resilient enough to stomach more rate pain aimed at taming 40-year high inflation.
Central banks globally are reiterating their focus on tighter policy even at the risk of economic growth, with the Bank of England, Swiss National Bank, Norway’s Norges Bank, and others taking a hawkish stance this week.
This “higher for longer” mantra has markets questioning whether the Fed can achieve a soft landing without triggering a recession. Higher rates add pressure through more expensive borrowing costs across mortgages, credit cards, and business loans.
Meanwhile, risks like expiring student loan relief, railroad strikes, geopolitical tensions, and supply chain constraints add further uncertainty on top of the Fed’s intentional growth slowdown.
Semiconductor stock Broadcom fell 2.7% on reports Google may drop the chip supplier for its artificial intelligence units by 2027. The Philadelphia Semiconductor Index has plunged over 30% year-to-date on demand worries.
All 11 S&P 500 sectors dropped at least 1%, with real estate down over 3% for its worst single-day performance since March 2020.
Declining stocks led advancers by nearly 6-to-1 on the NYSE and 2.8-to-1 on the Nasdaq in a broad risk-off session.
While markets may see significant volatility in coming months, taking a long-term approach focused on quality companies can help weather Fed-driven uncertainty. Stay up to date on critical factors influencing markets and the economy.
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