NEW YORK: The S&P 500 moved into bear market territory and the dollar strengthened Friday as investors worried about the Federal Reserve’s tightening of inflation containment policies and fueled fears of a recession.
Shares had previously recovered in Europe and Asia after China lowered a key credit benchmark to bolster its weakening economy, initially helping to boost gains on Wall Street.
China cut its prime rate on five-year loans, which affect mortgage prices, by 15 basis points, a cut that was sharper than expected as authorities try to cushion the effects of an economic slowdown.
The benchmark S&P 500 slipped below 3837,248, or 20% below its closing record on January 3, in a drop that would confirm a bear market if the index closes below that level.
How long the downdraft lasts in stocks depends on when inflation breaks, said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.
“What really upset investors this week, myself included, is when you have the types of companies that typically do well in economic softness, do terrible,” Tuz said, referring to poor earnings results at Walmart Inc and Target Corp.
The S&P 500 lost 1.80%, the Dow Jones Industrial Average fell 1.49% and the Nasdaq Composite fell 2.54%.
Stock valuations need to come down and the expected return on investment, the discount rate, needs to go up, said Stephen Auth, chief investment officer of equities at Federated Hermes.
“The market is beginning to understand the idea that this could be a new world where the discount rate on risky assets is no longer zero,” Auth said.
“You see all these different parts of the market coming under pressure at the same time and it’s just very disturbing for investors,” he added.
The MSCI index of stocks in 47 countries lost 0.82%, which is on track for its seventh consecutive weekly decline, the longest loss series since the index’s introduction in 1990.
Earlier, the pan-European STOXX 600 index closed 0.73% higher.
US Treasury yields fell for the third straight session on concerns about the growth outlook. The yield on benchmark 10-year bonds declined by 7.8 basis points to 2.778%.
Fed fund futures were firmer, suggesting that the US interest rate market has retreated somewhat from some of its more extreme estimates of rate hikes. The interest rate market has priced in a fed funds rate of 2.783% late next year, compared to a current level of 0.83%. Two weeks ago, the percentage was even 2.9%.
The dollar made up for some of its recent losses against the euro but kept pace for its worst weekly decline against the common currency since early February, as investors wondered if the dollar’s month-long rally was over. .
The dollar has been supported in recent months by a flight to safety amid a flight across markets amid fears of rising inflation, an aggressive Fed and the war in Ukraine.
The dollar index rose 0.223%, while the euro fell 0.4% to $1.0544. The Japanese yen rose 0.01% to 127.76 per dollar.
Euro-zone bond yields were higher after two days of sharp declines as risk sentiment improved following the rate cut in China.
Ten-year German government bond yields fell 1.2 basis points to 0.932%, well below last week’s eight-year high of 1.189%.
Markets are pricing 38 basis points of European Central Bank tightening by its July meeting. This suggests that a 25 basis point increase has been fully priced in and that the markets see a roughly 50/50 chance of an additional 25 basis point move.
Oil prices stabilized, on course for little change for the week, as a planned European Union ban on Russian oil allayed concerns that slowing economic growth will hurt demand.
US crude futures closed $1.02 higher at $113.23 and Brent rose 51 cents to settle at $112.55 a barrel.
Gold rose and headed for the first week of gains in five amid ongoing concerns about economic growth and the dollar’s decline over the course of the week.
Falling government bond yields bolstered the safe-haven metal on the day, pushing spot gold up 0.1% to $1,843.29 an ounce at 1802 GMT. Prices hit a week-long high earlier in the session.
US gold futures were up 0.1% at $1,842.10.
Bitcoin fell 4.16% to $29,029.40.
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