Stocks dropped sharply Friday with the Dow industrials suffering their worst one-day loss since October 2020 as investors prepared for tighter monetary policy from the Federal Reserve.
The declines in the three major U.S. indexes were broad-based, deepening as the day progressed. The Dow Jones Industrial Average was down 981 points, or 2.8%. The S&P 500 also dropped 2.8%, while the technology-heavy Nasdaq Composite fell 2.55%. All three indexes were down more than 1.8% for the week.
The week’s steep rise in government-bond yields showed signs of steadying, with the yield on the 10-year Treasury note ending Friday at 2.905%, down two of the past three trading days. Yields staged a climb earlier Friday before reversing course. Bond yields rise when prices decline.
Investors this week parsed first-quarter financial results from major companies in search of clues about the health of the economy, the consumer outlook and companies’ ability to cope with inflation. Of the companies that have reported so far, about 80% have beat analyst expectations, according to FactSet, which has helped provide some stability to the U.S. stock market.
Some stocks fell substantially Friday after reporting results. Shares of HCA Healthcare dropped about 22%, its largest percent decrease since March 2020, after the hospital chain lowered its guidance for the year. The company said volume and revenue for the first quarter were offset by higher-than-expected inflationary pressures on labor costs.
Healthcare stocks are often considered defensive, with money managers betting that consumers will pay medical bills before making discretionary purchases. The S&P 500’s healthcare sector was recently down 3.6%.
“Usually when the economy’s slowing down, or there is a perception it’ll slow down, there are obvious sectors to hide in. Those traditional sectors aren’t as safe from an earnings basis as they are historically because they still are going to have negative impact from inflation,” said Tavis McCourt, institutional equity strategist at Raymond James.
Gap shares fell 18% Friday after the retailer cut its fiscal first-quarter guidance and announced the departure of the president and chief executive of its Old Navy business.
Concerns about inflation and the pace of monetary tightening by the Fed also remained at the forefront of investors’ minds this week. On Thursday, Fed Chairman Jerome Powell gave investors a clear signal that the central bank is ready to tighten monetary policy more quickly and indicated it was likely to raise interest rates by a half-percentage point at its meeting in May.
A rate increase next month, following the Fed’s quarter percentage point increase in March, would mark the first time since 2006 that the central bank increased its policy rate at back-to-back meetings.
“The market is finally internalizing and factoring in the reality that the Fed really means what it says and it’s not going to back down,” said Tim Courtney, chief investment officer of Exencial Wealth Advisors. “Somebody had a saying, and it’s pretty good: ‘You don’t fight the Fed when the Fed is fighting inflation.’”
Many traders are now worried that the Fed’s tightening cycle could tip the economy into a recession. Next week, investors will parse fresh figures from the University of Michigan on April consumer sentiment.
“‘The market is finally internalizing and factoring in the reality that the Fed really means what it says and it’s not going to back down’”
“I think what you’re seeing is consumers are becoming much more hesitant,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown. “It’s a tricky tightrope that central-bank policy makers are having to tread right now. They need to put a lid on that boiling pot of inflation but they don’t want steam to be driven out of the economy completely.”
Shares of airlines held up better than the broader market. United Airlines Holdings added 1.2% and American Airlines Group slipped 0.2%. On Thursday, American said its sales hit a record in March, the first month since the pandemic began in which the airline’s total revenue surpassed 2019 levels. United said it has been able to pass the rise in fuel prices on to consumers.
Shares of American Express fell 2.8% after the credit-card company logged first-quarter net income of $2.10 billion, down from $2.24 billion a year earlier, even as spending on travel and entertainment surged.
Kimberly-Clark jumped 8% after the maker of Huggies diapers and Cottonelle toilet paper raised its sales-growth projection for 2022 and said first-quarter sales increased compared with the year before.
In commodities, Brent crude, the international benchmark for oil, fell $5.05 per barrel, or 4.5%, to $106.65
The ICE U.S. Dollar Index, which tracks the currency against a basket of others, rose 0.6%, on pace to notch a gain for the week. Including Friday, the index has climbed for all but two sessions in April, thanks to geopolitical concerns and looming interest-rate increases by the Fed.
Bitcoin edged down 3.2% from its Thursday 5 p.m. ET level to trade recently at $39,366.
In overseas markets, the pan-continental Stoxx Europe 600 closed down 1.8%, dragged down by technology companies. Germany’s DAX index fell 2.5%.
On Friday, data from the U.K.’s Office for National Statistics showed signs of consumer skittishness. U.K. retail sales volumes fell sharply last month. That sent the British pound falling 1.1% against the dollar to its lowest level since 2020. London’s FTSE 100 stock index fell 1.4%.
In Asia, Hong Kong’s Hang Seng lost 0.2% and Japan’s Nikkei 225 fell 1.6%. The Shanghai Composite, in contrast, bucked the trend, rising 0.2%.
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