Dow drops more than 500 points, posting worst week since January

The S&P 500 fell 1.3%. The Nasdaq Composite also fell 0.9%, as major tech stocks also fell.

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.

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 was happening,” he said. “This kind of massive sale 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 1.445% on Friday afternoon, from 1.509% on Thursday. Yields fall when prices rise.

Signals from the Fed on Wednesday had already started to slow a recent rally in stocks linked to a broad economic recovery, causing bank and energy stocks to pull back this week.

“If the Fed cuts bond purchases and raises rates, then all of a sudden the dragon of inflation 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 June 14.

All 11 sectors of the S&P 500 were down on Friday, with financials down more than 2%. Consumer Staples, Energy and Utilities both lost more than 1%.

“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 3.1% on Friday, continuing a weeklong massive sell-off. Prices fell more than 17% this week, marking their fourth worst week since 1984.

The selling pressure that has hit tech stocks, Treasuries and cryptocurrencies at various times over the past few months has so far not affected major stock market indices, but that could change, Michael said. Gayed, portfolio manager at ATAC Funds who writes the Delay Advance Report Newsletter.

“Everyone has gone too far with the risk and stimulus thesis,” he said, “and everyone forgot to be careful.”

Gold futures fell 0.1%, adding to their losses on Thursday, when they suffered their biggest drop in more than 10 months. The price of the precious metal tends to fall when investors anticipate higher rates and yield-bearing investments become more attractive.

Overseas, the pancontinental Stoxx Europe 600 index fell 1.6%.

The main Asian indices closed on a mixed note. Hong Kong’s Hang Seng index rose nearly 0.9% and South Korea’s Kospi Composite index rose 0.1%. Japan’s Nikkei 225 closed 0.2% lower and China’s Shanghai Composite was relatively stable.

Write to Caitlin Ostroff at [email protected] and Paul Vigna at [email protected]