In wicked reversal, stock market has worst day in two years

Just a day after notching its biggest rally in two years, the stock market made made a vicious U-turn on Thursday.

The sell-off was a sharp reversal of fortunes after markets posted large gains on Wednesday, a whiplash caused by temporary confusion over the Federal Reserve’s approach to raising interest rates this year.

The Dow Jones industrial average dropped more than 1,000 points as investors fretted anew over big picture economic indicators that raised fears of a possible recession. The tech-heavy Nasdaq was hit particularly hard, shedding 5%, one day after rising 3.2%.

The Fed hiked rates by a half a percentage point Wednesday afternoon, and some investors believed the central bank would move cautiously after that because of fears about an economic slowdown. That led to a huge, but fleeting, stock market rally, with the Dow Jones closing up 932 points, or 2.8%.

Those gains evaporated on Thursday, however, amid renewed fears about the economy’s ability to regain momentum after it shrank in the three months of 2022.

The Dow finished the day with a 3.1% slide to finish at 32,997, down from its January high of 36,800. The S&P 500 index sank 153 points, or 3.6%, while the tech-heavy Nasdaq was the biggest loser, giving back nearly 650 points, or 5%.

It was the worst trading session for the three major indexes in 2022, and the worst day for the Dow and Nasdaq since 2020.

Tech stocks slumped hard. Apple fell 5.6%, Google lost 4.8%, and Amazon dropped 7.6%. (Amazon founder Jeff Bezos owns The Washington Post.)

Twitter was one of the tech outliers, closing up nearly 2.7% on word that Elon Musk had lined up more than $7 billion in financing from Silicon Valley investment firms Andreessen Horowitz and Sequoia Capital, Oracle founder Larry Ellison and others. The infusion marked significant validation of the billionaire’s pursuit of the social media platform and raised the likelihood of the deal going through. But Tesla shares skidded 8.3% amid concerns Musk’s focus on Twitter might detract from his electric car company.

Risk-averse investors also backed off cryptocurrencies. Bitcoin and Ethereum each fell more than 8%.

“Thursday’s stock sell-off suggests that Wednesday’s . . . market action was a relief rally,” said Zach Stein, chief investment officer at asset management firm Carbon Collective. “We are still not out of the woods yet, as there is still too much uncertainty over how the Federal Reserve’s actions will tame inflation without causing a recession. The concerns that triggered the stock market correction over the past few months, such as inflation, the Russia and Ukraine war and surging oil prices, are still with us and haven’t been resolved yet.”

Traders looking for safer bets pushed up the yield on 10-year Treasury note to 3.04%, its highest mark since 2018.

The wild midweek swings, experts said, signified the challenges facing the economy as it attempts to emerge from the coronavirus pandemic. In the early days of the pandemic, stimulus payments and interest rate cuts flooded the economy with cash and credit to prop up struggling households and businesses.

Now the federal government is employing a much different strategy, curtailing federal assistance and raising rates. That is pulling the economy in different directions, with inflation spiking and growth slowing, but hiring remaining robust.

Some of those forces helped bring an estimated 1.5 million retirees back into the U.S. labor market over the past year, according to an analysis of Labor Department, somewhat loosening the hiring market and tempering wage gains, though private-sector average hourly earnings have continued to edge upward.

The Fed’s interest rate hike on Wednesday—the second of seven that are forecast for 2022—could make borrowing more expensive for corporations and households. This is supposed to ease inflationary pressures. But Fed officials are attempting to raise interest rates at such a pace that it doesn’t completely smother economic growth, a difficult balance to strike. If the economy cools too quickly, it could fall into a recession, generally defined as two consecutive quarters of decline.

Those were among the concerns leading investors to sell off stock market investments on Thursday.

“Soft landings are hard to pull off in monetary policy,” said Nancy Davis, founder of asset management firm Quadratic Capital Management.

The Labor Department is set to release a new jobs report on Friday that investors hope will show slower hiring and wage growth. U.S. employers posted a record 11.5 million job openings in March, and 4.5 million workers quit or changed jobs, reflecting fierce demand for talent and emboldened worker attitudes.

Fed Chair Jerome Powell has cited the “extremely, historically” tight job market as a major reason he says the economy can withstand higher interest rates without tumbling into recession.

“To stabilize the market, we need to see a weaker jobs report [on Friday],” said Chris Rupkey, chief economist at market research firm FWD Bonds. “The market needs something, anything in that report, maybe it’s wages, that will tell the Fed to stop raising rates or at least slow the rate hikes pace down.”

Domestic markets have also thrown a wrench in the plans. April was the worst month for the S&P 500 since March 2020 and capped its worst start to the calendar year since World War II.

Much of that, experts say, is due to the ripple effects of Russia’s invasion of Ukraine. The war has sent shock waves through energy markets as western sanctions crash down on the Kremlin’s oil exports and shuffle the global marketplace of who can buy energy from whom.

U.S. gas prices have jumped since the conflict began. RBOB, the premarket gasoline benchmark, traded at $3.67 at the Thursday market close, up 90 cents a gallon since Russian forces crossed into Ukraine on Feb. 24.

The sharp uptick in gasoline costs accounted for more than half of the monthly inflation in March, according to federal data.

Investors have to not-so-subtly signaled to the Fed a preference to keep interest rates low to stabilize Wall Street, even in the face of consumer inflation that has had spillover effects on corporate profits.

E-commerce marketplaces Etsy and eBay each lost 17% and 12%, respectively, Thursday as depressed consumer spending, energy costs and supply-chain snags cut into corporate profits.

Retailers Walmart and Target each gave back around 2% but have been slightly more insulated from those costs.