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New York, Sept. 30 (BUS): Wall Street closed miserably Friday with the worst monthly slide for the S&P 500 since March 2020, when the coronavirus pandemic sent global markets crashing.
The benchmark index ended the month with a loss of 9.3% and posted its third consecutive loss in the third quarter. The Associated Press (AP) reports that it is now at its lowest level since November 2020 and has fallen by more than a quarter since the start of the year.
The main reason financial markets continue to suffer is the fear of a possible recession, as interest rates rise in hopes of overcoming the high inflation that has swept the world.
“Quite frankly, if the recession is deep, you will have to see more selling,” said Quincy Crosby, chief equity strategist at LPL Financial. “That’s what the market is trying to navigate right now.”
The Federal Reserve has been at the forefront of the global campaign to slow economic growth and harm labor markets enough to undermine inflation but not so much that it causes a recession. More data arrived on Friday to suggest that the Fed will keep its foot firmly on the brakes on the economy, increasing the risks of going too far and causing a recession.
The Fed’s favorite inflation gauge showed that last month was worse than economists had expected. That should keep the Fed on the right track to continue raising interest rates and keeping them at high levels for a while, as it has loudly and repeatedly promised to do.
Vice President Lyle Brainard was the last Fed official on Friday to insist that he will not step back on interest rates prematurely. This helped maintain dashed hopes on Wall Street for a “pivot” toward easier rates as the economy slows.
“At this point, it’s not about whether we’ll have a recession, but what kind of recession it will be,” said Sean Sun, portfolio manager at Thornburg Investment Management.
Finally, the S&P 500 fell 54.85 points, or 1.5%, to close at 3,585.62 on Friday, after flipping between small losses and gains for most of the day. I have now recorded a weekly loss in six of the past seven weeks.
The Dow Jones Industrial Average fell 500.10 points, or 1.7%, to 28,725.51, and the Nasdaq Composite shed 161.89 points, or 1.5%, to 10,575.62.
Higher interest rates cut off one of the main levers that determine stock prices. Other leverage also appears to be at risk as the slowing economy, rising interest rates and other factors affect corporate earnings.
Cruise ship operator Carnival plunged 23.3% in the biggest drop among S&P 500 shares after it reported a larger fourth-quarter loss than analysts had expected and lower-than-expected returns. And Rivals Norwegian Cruise Line and Royal Caribbean Group fell 18% and 13.2%, respectively.
Nike shares fell 12.8 percent on its worst day in more than 20 years, after it said its profit fell during the summer due to discounts needed to clear overcrowded warehouses suddenly. The amount of footwear and gear in Nike’s inventory has ballooned 44% over the previous year.
The strong appreciation of the US dollar this year against other currencies also hurt Nike. Its global revenue rose only 4%, instead of the 10% it would have had if currency values had stayed the same.
Nike isn’t the only company that has seen its stock bulge. So you have many big-name retailers, and this bad news for businesses could actually mean some relief for shoppers if it leads to more discounts. Some glimmers of encouragement were echoed in Friday’s report on the Fed’s preferred inflation measure. That showed some slowdown in goods inflation, even as price gains for services continued to accelerate.
Another report on Friday also provided a glimmer of hope. A gauge of consumer confidence showed that US expectations for future inflation declined in September. This is critical for the Federal Reserve because severely constrained expectations of higher inflation can create a debilitating, self-reinforcing cycle that exacerbates it.
Treasury yields initially pulled back a bit on Friday, relieving some of the pressure that was building on the markets, but then turned higher in the late afternoon.
The yield on the 10-year Treasury rose to 3.81% from 3.79% late Thursday. The two-year yield, which closely tracks expectations for Fed action, rose to 4.23% from 4.19%.
However, a long list of other concerns remain hanging over global markets, including heightened tensions between most of Europe and Russia in the wake of the invasion of Ukraine. A controversial tax cut plan by the UK government has also recently sent bond markets spinning amid fears it could make inflation worse. Bond markets calmed down only a bit after the Bank of England made a mid-week buying pledge, but many UK government bonds are needed to bring yields down again.
Meanwhile, the astonishing and rapid appreciation of the US dollar against other currencies, increases the risk of creating so much pressure that something breaks somewhere in the global markets.
Stocks were mixed around the world after a report showed that inflation in 19 countries that use the euro currency rose to a record high, and data from China said factory activity was weak there.
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