By DAMIAN J. TROISE and STAN CHOE
EW YORK (AP) —
Already unnerved by the newest coronavirus variant, Wall Street’s losses
deepened on Tuesday after the head of the Federal Reserve said it will consider
shutting off its support for financial markets sooner than expected.
The S&P 500 was
1.7% lower in afternoon trading after Fed Chair Jerome Powell told Congress the
central bank may halt the billions of dollars of bond purchases it’s making
every month “perhaps a few months sooner.” It had been on pace to wrap up the
purchases, meant to goose the economy by lowering rates for mortgages and other
long-term loans, in June.
An end to the
purchases would open the door for the Fed to raise short-term interest rates
from their record low of nearly zero. That in turn would dilute a major
propellant that’s sent stocks to record heights and swatted away concerns about
an overly pricey market. As investors moved up their expectations for the Fed’s
first rate hike following Powell’s remarks, yields on short-term Treasurys
rose.
Losses for stocks
accelerated, with the drop for the Dow Jones Industrial Average more than
tripling in half an hour. It was down 603 points, or 1.7%, at 34,525, as of
3:22 p.m. Eastern.
The Nasdaq
composite was down 1.5%, holding up better than the rest of the market. Higher
interest rates tend to hurt stock prices broadly, but they hit hardest on those
seen as the most expensive or banking on big profit growth the furthest in the
future. Such companies play a bigger role in the Nasdaq than other indexes.
Microsoft fell 1.6% and chipmaker Nvidia slid 3.1%.
The whammy on
interest rates came after stocks were already weak in the morning due to
concerns about how badly the fast-spreading omicron variant of the
coronavirus may hit the global economy.
The CEO of Moderna
predicted in an interview with the Financial Times that existing COVID-19
vaccines may be less effective with omicron than earlier variants. Regeneron
also said Tuesday that its monoclonal antibody treatment may have reduced
effectiveness on omicron. Shares in Moderna fell 3.9%, while Regeneron dropped
2.1%.
Much is left to be
determined about the variant, including how much it may slow already gummed-up
supply chains or scare people away from stores. That uncertainty has sent Wall
Street through jagged up-and-down jolts as investors struggle to handicap how
much economic damage omicron will ultimately do.
“There will be
heightened volatility around any piece of information,” said Kristina Hooper,
chief global market strategist at Invesco. She said markets will likely remain
cautious “before we know more.”
The S&P 500
sank 2.3% Friday for its worst loss for February, only to rise 1.3% Monday as
investors reconsidered whether the reaction was overdone, before giving way to
Tuesday’s loss. The benchmark index is on pace to close out November with a
0.6% loss.
One measure of
nervousness in the stock market jumped almost 19% after nearing its level from
Friday, when it touched its highest point since March. Much of the rise
occurred after Powell began speaking.
Gold usually does
well when fear among investors is rising, but its price slipped 0.5%. Higher
interest rates could reduce the appeal of gold, which doesn’t pay its holders
any interest.
Crude oil prices
slid with concerns that a global economy weakened by omicron would burn less
fuel. Benchmark U.S. crude dropped 5.4% and touched its lowest level in three
months. Brent crude, the international standard, fell 3.9%.
If omicron does
ultimately do heavy damage to the global economy, it could put the Federal
Reserve in a difficult spot. Usually, the central bank will lower interest
rates, which encourages borrowers to spend more and investors to pay higher
prices for stocks.
But low rates can
also encourage inflation, which is already high across the global economy.
Powell acknowledged in his testimony before Congress that inflation has been
worse and lasted longer than the Fed expected. For months, officials described
inflation as only “transitory,” but Powell said that word no longer works.
The subsequent
losses for stocks Tuesday were widespread, with nearly all of the big stocks in
the S&P 500 lower.
Smaller stocks fell
even more, with the Russell 2000 index down 1.9%. Investors typically see them
getting hurt more than their larger rivals by both higher interest rates and by
a weaker U.S. economy.
One signal in the
bond market was also flashing some concern about the economy’s prospects.
Longer-term Treasurys usually offer higher yields than shorter-term Treasurys,
in part to make up for the increased risk that future inflation may eat into
their returns.
A 10-year Treasury
is still offering more in yield than a two-year Treasury, but the gap narrowed
sharply on Tuesday. The two-year yield rose to 0.52% from 0.51% late Monday.
The 10-year yield, meanwhile, fell to 1.44% from 1.52%.
Many investors see
that narrowed gap as meaning the bond market has less confidence in the
economy’s long-term strength. If it were to flip, with short-term yields rising
above long-term yields, many investors see that as a semi-reliable predictor of
a recession.
AP Business Writer
Alex Veiga in Los Angeles contributed.
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