Wall Street experienced a drop in stocks on Friday, resulting in its first losing week in the past six weeks. The S&P 500 decreased by 0.8% to reach 4,348.33, moving further away from its highest level in over a year. The Dow Jones Industrial Average also dropped by 0.6%, while the Nasdaq composite experienced a decline of 1%. International markets also fell, and crude oil prices slipped due to concerns about the global economy’s strength and its impact on fuel consumption.
A preliminary report on Europe’s economy revealed that it is weaker than initially expected, contributing to the hesitance in the market. Central banks worldwide have been increasing interest rates to control high inflation, which poses a risk of recession by slowing down the economy. The United States’ high interest rates have already caused contractions in manufacturing and other industries, along with failures in the banking system. The Federal Reserve Chair, Jerome Powell, stated the possibility of a couple more rate hikes by the end of the year.
Critics argue that the U.S. stock market was overdue for a break after its rapid ascent since mid-October. The recent positivity stemmed from the U.S. economy’s resilience in avoiding a recession, despite the aggressive rate hikes implemented by the Federal Reserve since early 2022. Wall Street hopes that slowing inflation would prompt the Fed to ease up on rates. Additionally, a handful of stocks saw significant growth due to the artificial intelligence technology frenzy.
However, some Wall Street traders underestimate the Fed’s determination. Economist Ethan Harris warns that the focus has shifted from avoiding a recession to addressing persistently high inflation, which may result in the central bank taking more action than anticipated. Despite manufacturing shrinking and output reaching a five-month low, a preliminary report indicates that the overall U.S. economy continues to grow. The service sector’s resilience may be tested by the manufacturing decline and the lagged effects of previous rate hikes.
Higher interest rates negatively impact various investments, with high-growth stocks especially affected. Tech companies like Microsoft, Tesla, and Nvidia experienced significant drops. On the other hand, CarMax saw a 10.1% increase in its stock following better-than-expected profit reports for the latest quarter. Coinbase also witnessed a 6.9% rise after winning a Supreme Court case related to arbitration.
In European stock markets, Germany’s DAX and France’s CAC 40 both experienced declines, while London’s FTSE 100 slipped by 0.5%. Central banks in Norway, Switzerland, and Turkey also raised borrowing rates, following the Bank of England’s unexpected hike to a 15-year high.
In Asia, Hong Kong’s Hang Seng dropped by 1.7% due to challenges in China’s economic recovery caused by the easing of COVID restrictions.
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