Investors quickly shifted portfolios this week as they absorbed signals from the Federal Reserve and braced for the impact of higher interest rates for longer than expected.
Stock prices plunged, the dollar soared and bond yields rose after Wednesday’s Fed meeting: Although interest rates were held steady, a change in Fed policymakers’ forecasts for how long they expect to keep rates at high levels sparked will hold, a sharp revaluation on Wall Street.
The S&P 500 index fell for the third week in a row, although it pared some of its losses with a modest rise on Friday. It ended the week down nearly 3 percent, its worst weekly performance since March, following the collapse of Silicon Valley Bank.
Yields on longer-term bonds, which serve as a gauge of corporate borrowing costs and can weigh on stock prices, rose to levels last seen in the run-up to the 2008 financial crisis. The 10-year Treasury yield briefly rose above 4.5 percent, its highest level since September 2007, and is up about half a percentage point so far this month, a significant development in this market.
According to data from EPFR Global, investors withdrew nearly $18 billion from stock markets in the United States in the week ending Wednesday, the most in a week since late 2022, and that was before the Fed’s announcements pushed yields even higher drove up.
The price-sensitive areas of the stock market, such as technology stocks, are particularly hard hit. The technology-heavy Nasdaq Composite fell 3.6 percent for the week.
“Investors appear concerned that a prolonged increase in interest rates will weigh on equity valuations and make it harder for the Fed to achieve a soft economic landing,” Truist’s Keith Lerner said in a research note on Friday.
Fed officials now predict interest rates will end next year at 5.1 percent, in line with policymakers’ median forecast, well above their forecast of 4.6 percent in June.
Fed Chairman Jerome H. Powell and many economists have expressed hope that the economy can remain resilient despite pressure from higher interest rates. Higher interest rates are still working their way through the economy, confronting consumers as they refinance mortgages or taking out new loans and hitting businesses as they roll over fixed debt when interest rates were much lower.
Partly it’s because the economy has held up so well that the Fed figures it needs to do more to slow it down to tame stubborn inflation while preventing it from plunging into recession. This economic resilience should mean the stock market is “better able to handle higher bond yields,” analysts at Deutsche Bank noted.
Despite significantly higher interest rates, the stock market is still up around 13 percent since the beginning of the year. However, investors are concerned about relying too much on forecasts of future interest rate trends.
In January, financial market trading suggested the Fed would cut interest rates as early as this month. Investors now expect rate cuts to begin in the second half of next year.
“Predictions are very difficult,” Powell said in a news conference on Wednesday. “Forecasters are a humble bunch with much reason to be humble.”
Over the next few months, investors will have to contend with the autoworker strike, the resumption of student loan repayments, and the looming government shutdown.
“In the short term, there is a lack of upside catalysts to become more bullish,” Truist’s Lerner said.
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