Stocks closed lower on Wall Street as the economic reports more favorable than expected conditions raised concerns about rising interest rates.
The S&P 500 closed with a decrease of 1.4%, after previously falling 2.9%. The nasdaq fell 2.2% and the Dow jones gave up 1 percent.
Employers laid off fewer workers than expected last week and the economy grew more than expected in the summer. Normally this would be good news, especially when there are major concerns about a possible recession. But it also suggests that the Federal Reserve may make good on its promise to keep interest rates aggressive, which hit the economy so hard.
The Federal Reserve is especially concerned that a still strong job market will give more oxygen to the inflation, which has dipped a bit in recent months but remains close to its highest level in decades. A report released Thursday indicated that employers laid off fewer workers than expected last week, while another report showed that overall, the US economy grew more than expected over the summer.
“The GDP data exceeded many expectations. There are concerns that the economy will not give up so easily and that it is fighting a battle that will likely force the Federal Reserve to maintain a pro-tightening stance and keep interest rates high for longer,” said Sam Stovall, Chief Investment Strategist. at CFRA Research in New York.
The reports forced a reminder of a longstanding mantra on Wall Street: Don’t fight the Federal Reserve. When it raises interest rates, the Federal Reserve intentionally slows down the economy and increases the risk of a possible recession. Higher rates also drag down the prices of stocks and other investments.
The technological values High growth markets have taken some of the worst hits of the year because they are considered some of the most vulnerable to rate hikes. A grim earnings report from chipmaker Micron Technology cast more pessimism on the sector on Thursday.
Widespread concern is growing over corporate profits across all sectors, which are being weighed down by higher interest rates, still-high inflation, and rising payroll and other costs. A drop in corporate earnings in 2023 could remove further support for stocks, after earnings strengthened for much of 2022.
Wall Street has been up and down of late as reports paint a mixed picture of the economy.
The real estate sector and other areas of the economy whose fortunes are closely linked to low interest rates have already registered sharp falls. But consumer confidence has strengthened recently, offering hope to the most important part of the economy: consumer spending.
Inflation has been moderating since it peaked in the summer, sometimes raising hopes on Wall Street that the Federal Reserve will backtrack on its rate talk. But Federal Reserve officials continue to insist that they will raise rates in 2023 and do not plan to cut them before 2024.
The Fed has already raised its overnight interest rate to its highest level in 15 years, after it started the year at a record low near zero. As a result, more and more economists and investors are predicting that the US economy will enter a recession in 2023.
And the Federal Reserve is just one of many central banks around the world that are raising rates at an explosive rate. Even the Bank of Japan, which has resisted keeping interest rates very low this year, has taken steps this week that would allow some rates to rise a bit.
The yield on the two-year US Treasury note, which usually tracks the Fed’s expectations, rose to 4.23% from 4.22% on Wednesday.
The 10-year yield, which helps dictate rates on mortgages and other cheap loans, fell to 3.66% from 3.67%.
(With information from EFE and AP)
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