Updated May 5, 2022 at 5:40 pm ET
It was an ugly day on Wall Street: stocks moved from one of the best days lately to one of the worst on Thursday.
The Dow was down 1063 points just a day after scoring nearly 1,000 points. The S&P 500 and tech Nasdaq have suffered similar fluctuations since one of their best days since 2020.
The sharp turn indicates incredible market volatility and deepening fears that the economy could find itself on the path to recession if the Federal Reserve begins one of the most aggressive battles with inflation in recent years.
“I think we need to prepare for an unstable market,” said Savita Subramanyan, head of US capital and quantitative strategy at Bank of America Securities.
Subramanian said that the markets are adapting to the new conditions of higher interest rates after years of historically low rates.
“I mean, over the last 30 or 40 years, we’ve seen rates slowly fall to zero, and now we’re starting to do the opposite,” she said.
It mostly depends on the Fed
On Wednesday, the Fed raised interest rates by half a percentage point, as Wall Street had expected. The Fed has said it plans to further raise rates of this magnitude as the central bank tightens its fight against persistently high inflation.
But investors were relieved after Fed Chairman Jerome Powell ruled out an increase of more than half a percentage point in future meetings.
Positive feelings did not continue. Literally a few hours later the markets went in the opposite direction when investors felt with serious reality that interest rates were rising, which would inevitably increase the cost of borrowing throughout the economy, from mortgages to bank loans.
The Fed wants to create a “soft landing” for the U.S. economy by raising rates enough to cool inflation without triggering a recession.
But investors are worried that the central bank will overdo it with raising rates, which will lead the economy to a deep recession in its quest to reduce inflation.
These fears lead to sharp fluctuations in the markets.
Ugly, ugly year for the markets
The fall on Thursday prolongs a year that has been ugly for markets.
The Fed’s rate hike also comes at a time of deep uncertainty in the global economy as Russia’s invasion of Ukraine continues and China is in the midst of blockades to stop the COVID outbreak.
During the pandemic, technology stocks increased quite sharply, but on Thursday they were among the biggest declines. Netflix, Amazon and Meta, Facebook’s parent company, fell about 7%.
Higher interest rates put pressure, in particular, on high-growth technology stocks because they are more dependent on debt.
Other companies whose shares rose during the pandemic are experiencing a reversal this year. Peloton closed by 9%, Wayfair – by 25.7%, and Carvana, a seller of used cars, fell by almost 18%.
On Wednesday, bonds also suffered severely: the yield on 10-year treasury bonds was more than 3% – the highest level since 2018.