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NEW YORK, Feb. 22 (AP) — Stocks slumped to their worst day in two months on Tuesday on worries about rising interest rates and a tightening on Wall Street and the economy.
The S&P 500 fell 2 percent, its biggest drop since the market sell-off in December. The Dow Jones Industrial Average fell 697 points, or 2.1%, while the Nasdaq Composite fell 2.5%.
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Home Depot was among the biggest losers in the market after its financial forecast fell short of Wall Street expectations. It fell 7.1% despite reporting stronger-than-expected profits for the final three months of 2022.
The retailer said it would spend $1 billion to increase wages for hourly workers in the U.S. and Canada. That adds to broader concerns that rising corporate costs have been eating into profits, one of the main levers used to determine share prices.
Another major lever also looks shaky as rates continue to rise. When safe bonds pay higher interest, they can make stocks and other investments look less attractive. Why take a lot of risk on stocks if something safer pays off more? Higher interest rates also increase the risk of a recession because they slow the economy in hopes of curbing inflation.
Interest rates and stock prices are so high that strategists at Morgan Stanley say U.S. stocks look more expensive than at any time since 2007.
The yield on the 10-year U.S. Treasury note, which helps set rates on mortgages and other important lending, jumped further to 3.95% from 3.82% late Friday. The two-year yield rose to 4.73% from 4.62%, depending more on expectations for the Fed. It was near its highest level since 2007.
“That’s where the pressure is on the market,” said Keith Lerner, chief market strategist at Truist Advisory Services.
Yields have surged this month as Wall Street raised its forecasts for how high the Fed will raise short-term interest rates to curb inflation. The Fed has raised its key overnight interest rate to a range of 4.50% to 4.75% from essentially zero early last year.
Several reports have emerged recently showing that the economy remains stronger than expected. That allayed fears that the economy could soon be in recession, which was good news for markets. But on the negative side, they could also exacerbate upward pressure on inflation and give the Fed more reason to stick to the “long-term high interest rate” policy it has been supporting.
The latest evidence came from a preliminary report on Tuesday that suggested business activity was gaining momentum. The services sector likely resumed growth last month and hit an eight-month high, according to S&P Global. Manufacturing, meanwhile, may still be contracting, but the data hit a four-month high.
The strength has led Wall Street’s more bearish investors to maintain their recession forecasts, but push back their timing until later in the year.
The Fed said in December that its typical policymaker expects short-term interest rates to rise to 5.1% by the end of this year, with the earliest rate cuts occurring in 2024. Speaking of which, Wall Street has largely become more aligned with the Fed’s views.
The concern is that the Fed may further increase its rate forecast when it releases its latest economic forecast next month. In addition to the stronger-than-expected job market and retail sales, recent reports suggest that inflation has not cooled as quickly and smoothly as hoped.
Those concerns stalled Wall Street’s strong rally at the start of the year. The S&P 500 is still up 4.1% so far this year after gaining 8.9% earlier.
Another threat to markets is that the Fed may not cut rates as quickly as in the past in the face of economic weakness, said Truist’s Lerner.
“This is the first time in over a decade that the Fed has had to worry about inflation,” he said. “What happened in the last year created scar tissue that could keep rates going longer.”
“When we do have a downturn, the Fed won’t be as aggressive as it has been in the past. They may still be thinking about inflation.”
While the job market and consumer spending have been resilient amid rising interest rates, some areas of the economy have shown more weakness. A report on Tuesday showed sales of existing homes slowed to their lowest level in more than a decade.
In overseas stock markets, manufacturing indicators in Europe and Asia were mixed, with shares mostly down after Russian President Vladimir Putin accused the West of threatening Russia. (Associated Press)
(This is an unedited and auto-generated story from a Syndicated News feed, the content body may not have been modified or edited by LatestLY staff)
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