NEW YORK – The Dow Jones Industrial Average fell more than 1,000 points on Monday as financial markets faltered in anticipation of anti-inflation measures by the Federal Reserve and worried about a possible conflict between Russia and Ukraine.
Stocks extended their three-week slide on Wall Street and put the S&P 500 on track for an alleged correction — a drop of 10% or more from its recent high. The price of oil and bitcoin have fallen, as has the yield on 10-year Treasuries, a sign that investors are worried about the economy.
Stocks have fallen steadily so far this year, as the Federal Reserve signaled its willingness to start raising its benchmark short-term interest rate in 2022 in an effort to tame inflation, which is at its highest levels in nearly four decades. The Fed’s short-term interest rate has been pegged close to zero since the pandemic hit the global economy in 2020, and that has led to borrowing and spending by consumers and businesses.
The Fed kept downward pressure on long-term interest rates by buying trillions of dollars in government and corporate bonds, but those emergency purchases are set to expire in March. Raising rates is intended to help slow economic growth and the rate of inflation.
By the afternoon, the Dow was flat and down 721 points, or 21%, to 33,544. The S&P 500 fell 2.6% to 4,285, now down about 10.7% from its closing high on January 3. A close at 4,316.90 or lower will trigger a correction. The Nasdaq index fell 2.8 percent.
“There is a short-term panic and part of that is a high level of uncertainty about what the Fed will do,” said Silvia Jablonsky, chief investment officer at Defiance ETFs.
Jablonsky said investors did not buy shares during the recent downturn. “Buy on the dip” has been a hallmark of market optimism for much of the period following the 2008-2009 financial crisis.
Technology stocks once again led the broader market decline as investors shifted money away from higher-priced stocks in anticipation of higher interest rates. High rates make shares in high-tech airlines and other expensive growth stocks relatively less attractive.
Apple shares fell 3.1 percent and Microsoft 3.3 percent. Nvidia, a high-altitude airline in 2021, is down 7.4% and is now down more than 26% in January. The technology sector is the largest in the S&P 500 and is now down more than 14% so far this year.
The sale extended to cryptocurrencies. Bitcoin dropped to $33,000 overnight, but rose again above $36,000 in the early afternoon. The digital currency is still well below its high of more than $68,000 in November.
The market is waiting to hear from Fed policy makers after their last meeting ends on Wednesday. Some economists have expressed concern that the Fed is already acting too late to combat high inflation.
Other economists say they worry that the Fed may act too aggressively. They argue that too many rate hikes would risk causing a recession and in no way slow inflation. From this point of view, higher prices often reflect congested supply chains that the Fed’s increases cannot handle.
When the Federal Reserve boosts the short-term interest rate, it tends to make borrowing more expensive for consumers and businesses, slowing the economy with the intent of reducing inflation. This can reduce a company’s earnings, which tend to dictate stock prices in the long run.
The Fed’s standard short-term interest rate currently ranges from 0% to 0.25%. Investors now see a nearly 65% chance that the Fed will raise interest rates four times by the end of the year, up from a 35% chance a month ago, according to CME Group’s Fed Watch.
Wall Street expects the first rate hike in March. In a note to clients over the weekend, Goldman Sachs forecast four rate hikes this year, but said the Fed may have to raise rates five or more times if supply chain problems and wage growth keep inflation at elevated levels.
Investors are also watching developments in Ukraine. Tensions rose on Monday between Russia and the West over fears that Moscow was planning an invasion of Ukraine, with NATO outlining the possibility of deploying troops and ships.
The European STOXX 600 Index closed 3.6% lower on concerns about Fed tightening and concerns about the situation around Ukraine. The Russian ruble also fell after US President Joe Biden indicated that in the event of a Russian invasion, the US could block Russian banks from accessing dollars or impose other sanctions.
In the US markets, healthcare shares also fell sharply on Monday, along with a broad group of retailers. Target fell 2.1% and Pfizer stock fell 4.1%.
Bond yields fell. The yield on the 10-year Treasury fell to 1.72% from 1.74% late Friday. The impact of lower returns on banks, which depend on higher returns to collect more profitable interest on loans. Bank of America is down 3.5%.
Inflation puts pressure on businesses and consumers as demand for goods continues to exceed supplies. Companies warn that supply chain problems and rising raw material costs can hamper their finances. Retailers, food producers and others have raised commodity prices to try to offset the effect.
The rising costs are raising concerns that consumers will start to cut back on spending due to the ongoing pressure on their wallets.
Investors are watching the latest round of corporate earnings, in part, to gauge how companies are handling higher prices and what they plan to do as inflation continues to pressure operations.
On Tuesday, American Express, Johnson & Johnson and Microsoft announced the results. Boeing and Tesla announced their results on Wednesday. McDonald’s, Southwest Airlines and Apple report results on Thursday.
Wall Street also has several key economic reports to look forward to this week. Investors will get more data on consumer sentiment with the Conference Board’s January Consumer Confidence Index release on Tuesday. The Commerce Department released its report on fourth-quarter gross domestic product on Thursday and its report on personal income and spending for December on Friday.
Associated Press reporters Christopher Rogaber contributed in Washington, Stan Choi in New York and David McHugh in Frankfurt.