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Friday, September 30, 2022
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Friday, September 30, 2022
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    US stocks slump; S&P 500 has its worst week since February

    NEW YORK (AP) — Stocks sank again on Wall Street on Friday, knocking the S&P 500 to its worst weekly loss since February, as more steam comes out of banks and other stocks that soared earlier this year with expectations for the economy and inflation.

    The S&P 500 fell 55.41 points, or 1.3 per cent, to 4,166.45 in a widespread slump. It was the worst day for the index in a month as unease grows about the Federal Reserve making plans to eventually offer less help to markets.

    The Dow Jones Industrial Average lost 533.37 points, or 1.6 per cent, to 33,290.08, and the Nasdaq composite fell 130.97, or 0.9 per cent, to 14,030.38.

    Investors are still recalibrating their moves following the Federal Reserve’s signal this week that it may raise short-term interest rates twice by late 2023, earlier than expected.

    The Fed also began talks about slowing its bond-buying programme that’s helping to keep longer-term rates low.

    On Friday, St Louis Federal Reserve President James Bullard said on CNBC his personal prediction was that the first rate increase may come as soon as next year.

    Trader works on the trading floor of the New York Stock Exchange. PHOTO: AP

    It’s an acknowledgment that a rebounding economy with near-record prices for homes and stocks may not need super low rates much longer. A recent burst of inflation may also be upping the pressure.

    But any pullback in Fed support would be a big change for markets, which have been feasting on ultra-low rates for more than a year. It marked a “U-turn on Easy Street”, as strategists at BofA Global Research described it. That’s hurt stocks of banks, oil producers and other companies whose profits are closely tied to the strength of the economy in particular. On the other side, stocks of companies able to grow almost regardless of the economy’s fortunes have held up better.

    The Dow Jones Industrial Average, which is full of companies whose profits move more with the economy, lost 3.5 per cent this past week. That’s its worst since October. The Nasdaq composite, which has more high-growth tech stocks, dipped a much more modest 0.3 per cent.

    Of course, all the major United States (US) stock indexes remain relatively close to their record highs, as the economy continues to leap out of the recession caused by the pandemic.

    The S&P 500 is only about two per cent below its all-time high set on Monday, and the Dow is within five per cent of its record set last month. A measure of nervousness in the stock market, known as the VIX, rose Friday but is only back to where it was about a month ago.

    Banks are taking a hit from the shrinking gap between shorter and longer-term interest rates, which helped send financial stocks in the S&P 500 down 2.4 per cent on Friday. That was one of the sharpest losses among the 11 sectors that make up the index.

    When the gap is wide, the industry can make big profits from borrowing cash in short-term markets and lending it out at longer-term rates.

    But short-term yields jumped sharply this week after the Fed’s indication that it may be moving up the timeline for rate increases.

    The two-year Treasury yield rose to 0.25 per cent on Friday from 0.23 per cent a day before and from 0.16 per cent a week before.

    The 10-year Treasury yield, which is less directly affected by Fed moves, ended the week close to where it started, though there were some jagged moves up and down in the interim. It sat at 1.43 per cent on Friday afternoon, down from 1.51 per cent late Thursday but not far off from its 1.46 per cent level a week earlier. The rate pressure helped send JPMorgan Chase down 2.5 per cent, and it was one of the heaviest weights on the S&P 500. Bank of America dropped 2.6 per cent.

    The quickly recovering economy and some supply shortages have helped send prices soaring across the economy recently, from lumber to airline tickets to used cars.

    The Fed has said it expects high inflation to be only “transitory”, and prices for lumber at least have already started to moderate a bit. Much of Wall Street also said inflation looks to be only temporary, but part of the Fed’s mission is to keep prices under control.

    “You just don’t have the firms able to build capacity to meet demand,” said investment strategy analyst at Wells Fargo Investment Institute Ken Johnson. “Investors are nervous about that.”

    The first action the Fed is likely to take would be a slowdown in its USD120 billion of monthly bond purchases, which are helping to keep mortgages cheap, but the Fed’s chair said such a tapering is still likely a ways away.

    Besides keeping inflation steady, the Fed’s other main job is to keep the job market healthy. Employment has been improving, but growth has slowed in recent months.

    “That gives investors some reassurance that the Fed isn’t going to move on rates when the economy, from a labour market perspective, isn’t back to where it was,” Johnson said.

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