Stocks fell on Monday amid fears the Federal Reserve may continue tightening until it steers the economy into recession.
The Dow Jones Industrial Average fell 545 points, or 1.6%, while the S&P 500 and Nasdaq Composite declined 2% and nearly 2.1%, respectively.
Tesla shares fell about 6% on reports of a production cut at its Shanghai factory, while Macau-linked Casino shares rallied on hopes of an easing of Covid-19 restrictions. VF Corp. shares slipped after lowering their outlook.
A hotter-than-expected November edition of ISM Services’ report fueled concerns that the Fed will continue to rise after the index beat Dow Jones estimates and has been rising since October.
Bond yields rose as stocks fell, with returns in line with the benchmark 10 years treasury last traded up 10 basis points at 3.605%.
“Obviously equity markets want to go higher, but that depends very much on inflation being brought under control,” said Peter Essele, head of portfolio management at the Commonwealth Financial Network. “So when you have better-than-expected prints on an economic number that comes out, that tends to fuel inflation concerns, which drives interest rates higher.”
Following a speech by Fed Chair Jerome Powell last week, markets are largely expecting the central bank to agree to a 0.5 percentage point hike in interest rates. That would be a move down from a series of four consecutive gains of 0.75 percentage points.
However, Powell also said that the “final rate,” or point at which the Fed stops rising, likely “needs to be a little higher” than what was indicated at the September meeting. That could mean a fed funds rate rising to over 5% from its current target range of 3.75% to 4%.
The main averages come from a second consecutive positive week.
Despite the recent rally, Mike Wilson, chief US equities strategist at Morgan Stanley, said investors should consider profit-taking as the risk/reward trade-off in equities is likely limited as the S&P converges on the bank’s original tactical target range of 4,000 to 4,150 approaching.
“As suggested two weeks ago, for this tactical rally to turn higher, back-end rates would need to fall,” he said in a note to clients on Monday. “Fast forward to today and that is exactly what happened. However, we are now squarely within our original upside targets and recommend taking profits before the bear returns in earnest.”
— CNBC’s Jeff Cox contributed to the coverage
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