Stocks fell on Friday, capping one of Wall Street’s worst weeks of the year, with corporate executives, bankers and managers of trillions of dollars in investor money warning of further pain for the economy and markets.
The plunge gave investors yet another whiplash after a series of surprises this summer ended a rally and steadily eroded optimism in financial markets.
After hitting a low in June, the S&P 500 had gained more than 17 percent by mid-August before losing momentum again. This week’s sell-off leaves the benchmark stock index for the year down nearly 19 percent and 5.6 percent above the June low. Friday’s 0.7 percent drop brought the index’s weekly loss near a 5 percent mark, which it has breached just three times this year.
Now some of the world’s most powerful trading houses, which make investments on behalf of pension funds, governments and other investors, are warning that more pain is to come.
“If you had asked me a year ago, ‘What is the worst-case scenario for financial markets?’ I think things are now worse than anything we could have imagined,” said Nicolai Tangen, head of Norway’s sovereign wealth fund, the largest of its kind. The fund manages money generated by Norway’s massive oil and gas sales, and has invested $1.4 trillion globally.
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Friday’s drop came after General Electric’s chief financial officer Carolina Dybeck Happe lamented ongoing pressures on the supply chain at a conference on Thursday and logistics giant FedEx warned of a global slump that would hurt its profits. Together they contributed to a series of corporate alerts that have shaken confidence in the outlook for the economy.
GE’s share price fell 3.7 percent on Friday, while FedEx fell more than 21 percent. FedEx chief executive Raj Subramaniam told CNBC on Thursday that he was predicting a “worldwide recession.”
Friday’s drop followed the S&P 500’s worst one-day drop since June 2020, a 4.3 percent drop on Tuesday after the widely watched CPI dashed hopes of a gradual decline in inflation. The report renewed concerns that the Federal Reserve could push the United States into recession as it tries to contain prices.
Economic concerns were evident in other corners of the financial markets as well. Corporate bond prices fell and oil prices fell for the third straight week.
Mr. Tangen said he doesn’t think there is an investment area anywhere in the world that will make money in the near future. “That’s the really depressing thing,” he said.
The key issue worrying investors is how far the Fed will have to go to break the cycle of inflation hitting the US economy. Prices started rising last year on the back of businesses reopening and pent-up consumer demand, and continued to rise as energy prices soared following Russia’s invasion of Ukraine. Tuesday’s inflation report showed it has now assumed a pervasive nature, compounded by companies pressured by workers to raise wages as they struggle to cope with rising living costs.
“We’re faced with inflation expectations that are quite embedded,” said Seth Bernstein, president and CEO of AllianceBernstein, a fund manager with more than $600 billion in assets. A recession is the only way to “break” it, he said.
The Fed’s primary tool for controlling inflation is its benchmark interest rate, which it raised from near zero to a range of 2.25 to 2.5 percent back in March. Rate hikes are expected again next week.
Investors have upgraded their forecasts of how much the Fed will need to hike rates and how long the central bank will keep them high, predicting more corporate pain, lower stock prices and higher unemployment.
Prices in the futures markets, which indicate forecasts for interest rates, show an expected three-quarters-of-a-percent point hike, which will be managed by the Fed when central bank governors meet next week. Anything higher would mark a sharp move not seen since 1984 and financial markets could fall further.
Overall, futures are pointing to a peak in interest rates of 4.25 to 4.5 percent next year, a full 2 percentage points above the Fed’s current benchmark rate level.
And the Fed is not alone in its campaign to raise interest rates to fight inflation. On Thursday, the World Bank supplemented its recession warnings, saying the combined effect of central banks around the world simultaneously raising interest rates could push the global economy into a downturn as early as next year.
Forecasts differ for the largest US banks. Wells Fargo and Citi economists expect a recession. Goldman Sachs chief executive David Solomon said on Friday his long-term view had not been changed by this week’s new inflation data, nor by the market turmoil that followed. However, he noted that financial markets are “in a phase where they’re lower, longer and bumpier.”
JPMorgan and Morgan Stanley continue to forecast what is known as a soft landing, in which the Fed is able to rein in the economy with higher interest rates enough to bring inflation down without going too far and triggering a recession.
Dan Ivascyn, chief investment officer of fixed income investment firm Pimco, which has around $1.8 trillion under management, said he was “slightly more concerned” about how severe inflationary pressures are across the US economy following the release of Tuesday’s data.
“Investors can expect a lot more volatility in the markets into the year-end,” he said. “We believe that 2023 will still be full of uncertainty.”
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