Stock Market Today: Stocks Drop as Allure Grows to Buy Treasury Bill and Chill
Wall Street experienced a sharp decline as U.S. interest rates are expected to remain high, causing stocks to fall worldwide.
Wall Street experienced a significant decline on Thursday, with stocks worldwide also suffering losses. This was due to the expectation that U.S. interest rates would remain high well into the following year. The S&P 500 had its worst day since March, losing 1.6%. The previous day, it had already dropped 0.9% after the Federal Reserve indicated that it may only cut interest rates by half of what was initially predicted. The Federal Reserve has already raised its main interest rate to levels not seen since 2001, which has helped slow inflation but has negatively impacted investment prices.
High-growth stocks, particularly in the tech sector, were hit the hardest by the high rates. The Nasdaq composite fell 1.8%, with Amazon dropping 4.4%, Nvidia losing 2.9%, and Tesla experiencing a 2.6% decline. The Dow Jones Industrial Average dropped by 370 points, or 1.1%.
When interest rates rise, stock prices tend to fall as they are considered riskier investments. Investors are less willing to take on the potential volatility of stocks when Treasury bonds are offering higher interest rates. Currently, a 10-year Treasury bond is yielding 4.48%, up from 4.40% the previous day and a significant increase from 0.50% three years ago. This is near its highest level since 2007.
On the other hand, the two-year Treasury yield fluctuated due to mixed reports on the economy. It slipped to 5.14% from 5.17% the previous day after initially climbing in the morning.
One report indicated that fewer U.S. workers applied for unemployment benefits than expected, signaling a resilient job market. This solid labor market helps alleviate concerns about a potential recession. However, it also provides households with more spending power, which could lead to companies raising prices and putting upward pressure on inflation. This could give the Federal Reserve more reason to keep interest rates higher for a longer period.
Another report suggested that manufacturing in the mid-Atlantic region is contracting more than economists had anticipated. Additionally, sales of previously occupied U.S. homes were weaker than economists had expected.
Industries such as manufacturing and housing have been particularly affected by the higher interest rates and have struggled compared to the broader job market.
If the Federal Reserve follows through on the latest forecasts from its policy-making officials, interest rates may remain high. These officials have indicated that they could raise the federal funds rate once more this year and then only cut it by half a percentage point through 2024. This is a significant change from three months ago when a full percentage point of cuts was considered the most likely path. The goal is to bring inflation back down to the Federal Reserve's target of 2%.
According to Goldman Sachs economist David Mericle, the latest projections "raises the bar for rate cuts next year." He has adjusted his forecast for the first interest rate cut to the final quarter of 2024, whereas he previously believed it could happen in the spring. He envisions a scenario where the Federal Reserve waits until something goes wrong before delivering either small cuts in response to a smaller growth threat or substantial cuts in response to a full recession.
In 2019, the Federal Reserve cut interest rates due to fears that high rates could push the economy into a recession, especially with escalating trade tensions worldwide.
Higher interest rates intentionally slow down the economy and increase pressure across the financial sector. They have previously contributed to the collapse of several U.S. banks and have adversely affected investment prices. Stocks that rely on future growth expectations are typically the most affected, which is why tech stocks often experience significant swings in response to changes in interest rates.
Cisco Systems also experienced a decline after announcing its acquisition of cybersecurity company Splunk for approximately $28 billion in cash. Cisco fell 3.9%, while Splunk saw a 20.8% increase.
On a positive note, FedEx rose 4.5% after reporting stronger-than-expected profits for the latest quarter.
Overall, the S&P 500 fell by 72.20 points to 4,330.00, returning to its June levels. The Dow dropped by 370.46 points to 34,070.42, and the Nasdaq lost 245.14 points to 13,223.98.
In other global markets, London's FTSE 100 slipped 0.7% after the Bank of England decided to keep interest rates steady. Expectations were for another rate hike, but a surprising report showed a drop in U.K. inflation.
Stock markets worldwide experienced significant weakness, with Japan's Nikkei 225 falling 1.4%, South Korea's Kospi dropping 1.7%, and France's CAC 40 losing 1.6%.
New Zealand's benchmark index remained relatively stable after data released by Statistics New Zealand indicated a 3.2% annual expansion of the economy in the April-June quarter. Finance Minister Grant Robertson stated that the economy was turning a corner and growing at twice the rate predicted by economists.
Contributions to this article were made by AP Business Writers Matt Ott and Elaine Kurtenbach, as well as AP Writer Nick Perry.