Dow Slides as Investors Assess Fed Comments

U.S. stocks fell, with technology stocks leading the way, as investors assessed the implications of Federal Reserve’s most aggressive tightening of monetary policy in more than two decades. 

The S&P 500 dropped 2.1% in early trading Thursday. The tech-focused Nasdaq Composite Index lost 3.2%, and the Dow Jones Industrial Average retreated 1.6%, or 551 points. 

The pullback came one day after major U.S. stock indexes soared, with the Dow climbing more than 900 points, its biggest one-day gain since 2020. On Wednesday, central bank officials approved a half-percentage-point interest rate increase, lifting the federal-funds rate to a target range between 0.75% and 1%.

But it was Fed Chairman Jerome Powell who energized markets after he said officials weren’t actively considering raising rates by three-fourths of a percentage point. He instead indicated that additional half-point increases could be warranted at coming meetings.

Mr. Powell’s comments offered relief to investors who had become increasingly fearful that the Fed could raise interest rates too far, too fast and eventually tip the economy into a recession. 

By Thursday, investor optimism had begun to wane. Even with a larger interest-rate increase off the table in the coming months, investors are still facing the most aggressive tightening of U.S. monetary policy since 2000—the last time the central bank last raised rates by a half-point. Many investors are now questioning how high the Fed might raise rates over the next two years amid soaring inflation and how that might ripple across the economy and corporate profits.

“The market yesterday was a relief rally,” said Seema Shah, chief strategist at Principal Global Investors. Yet by Thursday, she said, the realities of a more challenging environment for stocks were starting to settle in. Though she said she believes inflation has peaked or is close to peaking, other macroeconomic considerations will continue to weigh on investors and the path of interest rates, she said.

“Given all the external factors—mainly the Covid-19 lockdowns in China, the intensification of supply-chain issues and the Russia-Ukraine conflict that will drive energy prices higher…there is a ton of uncertainty,” she said.

Federal Reserve Chairman Jerome Powell said Wednesday the central bank approved a half-percentage-point interest-rate increase in an effort to reduce inflation that is running at a four-decade high. Photo: Win McNamee/Getty Images

On Thursday morning, those jitters were seen across the market. Growth stocks were particularly hard hit. Chip makers Advanced Micro Devices, Nvidia and NXP Semiconductors all declined at least 2.8%. Megacap technology stocks also pulled back, with Meta Platforms falling 1.7% and Netflix declining 4.6%.

Higher interest rates can diminish the allure of technology stocks by reducing the value that investors place on their future earnings. Higher yields in general also boost the attractiveness of fixed-income products versus riskier assets such as stocks. 

Bucking the trend, shares of Twitter jumped 4% to $51.02 after Tesla Chief Executive Elon Musk said he has received letters from investors committing more than $7 billion in fresh financing to boost the equity part of his offer to buy the social-media company. Last month, Twitter agreed to a deal with Mr. Musk to take the company private for $54.20 a share.

Booking Holdings jumped 6.3% after its revenue exceeded expectations and it said it has seen strengthening of global travel trends in the current quarter. 

Etsy tumbled 17% after the online marketplace released guidance below expectations for the current quarter. 

Shares of Wayfair also slid, losing 20%, after the online home goods retailer posted a bigger-than-expected quarterly loss. Shopify’s first-quarter earnings missed analysts’ expectations, sending the stock plummeting 17%.

In the bond market, the yield on the benchmark 10-year Treasury note rose to 3.021%, from 2.914% Wednesday. Bond prices and yields move in opposite directions. On Wednesday, bonds staged a rebound alongside stocks before losing steam.

Traders worked on the floor of the New York Stock Exchange on Wednesday.

Photo: justin lane/Shutterstock

Assets that investors perceive as safer were among those to rally Thursday as money managers looked for havens as stocks and bonds fell in tandem. Even after Wednesday’s rally, some strategists and investors said they were hesitant about the stock market’s outlook in the weeks and months ahead.

“We struggle to see who is going to be a massive buyer of equities in the next couple weeks,” said Viraj Patel, global macro strategist at Vanda Research. “It’s a waiting game for that catalyst…You need more conviction from the data, either to show that inflation has topped out or the economy is slowing and that the Fed won’t need to be as aggressive.”

The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, rose 0.9%. On Wednesday, the index tumbled 0.9%, its largest decline since November 2020. The dollar’s status as the world’s reserve currency makes it a particularly attractive haven for investors. 

Gold prices, another preferred haven, also climbed, rising 1.6% to $1,898.40 a troy ounce. 

The British pound dropped 2% against the dollar to $1.2378 after the Bank of England raised interest rates, but signaled that it is likely to move cautiously in coming months as worries grow over a slide into recession.

In oil markets, Brent crude, the international benchmark for oil, rose 2.7% to $113.02 a barrel. On Wednesday, Brent logged its largest one-day gain in more than three weeks after the European Union proposed a ban on imports of Russian crude within six months and on refined oil products from the country by the end of the year. The Organization of the Petroleum Exporting Countries and its allies, together called OPEC+, are expected to meet Thursday to discuss production targets.

Overseas, the pan-continental Stoxx Europe 600 rose 0.7%. Banks, technology stocks and transport companies were among those that rallied. Italian bank UniCredit climbed 5.3% after its revenue came in above analyst expectations. Airbus jumped 7.3% after the plane maker reported an increase in net income and moved to increase production of its bestselling A320 single-aisle airliner.

Shell gained 3.7% after its first-quarter profit grew, boosted by soaring commodity prices. 

In Asia, Hong Kong’s Hang Seng fell 0.4% and the Shanghai Composite rose 0.7%. Markets in Japan were closed for a holiday.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com

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