Stocks suffered their longest losing streak of the year as geopolitical turmoil rattled Wall Street and investors cut bets that the Federal Reserve would cut interest rates soon.
The S&P 500 index fell 0.9% on Friday, its sixth straight year of declines and its worst decline since October 2022.
The decline pushed the S&P 500 index down more than 3% for the week, its third straight week of declines. By this measure, the index’s weekly losing streak is the longest since September, when concerns about rising government debt and a possible government shutdown compounded concerns about the impact of high interest rates.
Those fears dissipated toward the end of last year, as inflation cooled and investors began betting that the Fed would cut interest rates soon, sparking a ferocious rally in stocks during the first three months of 2024.
But this month, fears that stubborn inflation will lead the Fed to keep interest rates high have returned, exacerbated by the escalation of the Middle East conflict that saw Israel attack Iran early Friday.
“It’s clearly a bleak picture,” said Andrew Brenner, head of international fixed income at National Alliance Securities.
Investors withdrew about $21 billion from funds investing in U.S. stocks in the two weeks ending Wednesday, according to data from EPFR Global, which tracks capital flows. By comparison, annual inflows through early April were about $80 billion. And anxiety isn’t just manifested in the stock market.
Yields on U.S. Treasuries, which underpin interest rates on various loans, are rising. The average interest rate on the 30-year mortgage, the most popular mortgage in the United States, exceeded 7% on Thursday for the first time this year.
The dollar has also appreciated significantly, putting pressure on countries that import goods from the United States and issue dollar-denominated bonds. And geopolitical tensions have pushed oil prices up more than 13% since the start of the year.
“Right now, nothing looks good,” Brenner said.
Recent reports of higher-than-expected inflation have changed investors’ expectations for the Fed, which has kept key interest rates near 20-year highs. “Recent statistics clearly do not give us more confidence, and in fact, it may take longer than expected to achieve that confidence,” Federal Reserve Chairman Jerome H. Powell said at an event in Washington on Tuesday. “It shows that there is a high level of sexuality.”
Economists at Société Générale no longer expect the Fed to cut interest rates this year. Economists at BNP Paribas and Wells Fargo also lowered their expectations for rate cuts.
Traders in the futures market, where investors can bet on the direction of interest rates, are betting on one, and possibly two, quarter-point cuts by the end of the year. At the beginning of the year, traders had predicted six rate cuts over this period.
Initially, the changes appeared to be welcomed by stock investors. All else being equal, a strong economy is a positive for the stock market, and although some inflation figures were starting to buck this trend earlier this year, the broader economy is set to take hold in 2023. It wasn’t enough to disrupt the chill. But recent inflation reports have continued to disappoint investors and economists, making them difficult to ignore.
New York Fed President John Williams said this week that even if it’s not the most likely scenario he believes, if inflation remains high, further rate hikes rather than rate cuts could be justified. Ta. . Other officials have said the Fed may have to wait much later this year or even into 2025 to start cutting rates.
So far, concerns have not risen to the point where they threaten the strength of the U.S. economy. The S&P 500 index is down 5.5% this month, but is still up more than 4% for the year.
A recent Bank of America survey of fund managers around the world also found that respondents expected global economic growth to accelerate, the most optimistic view since January 2022. It was done. The biggest risk, respondents said, is a rise in inflation, which could keep interest rates high and weigh on overseas and domestic growth.
Reflecting some of those concerns, the Russell 2000 index, which tracks small and medium-sized companies, which tend to be more sensitive to the outlook for the domestic economy, has fallen by about 4% for the year.
“I think the recent selling pressure is just the beginning of a larger move,” said Peter Chill, head of macro strategy at Academy Securities.
