Dow slides more than 500 points as recession fears mount

Stocks dropped for a third straight session and suffered a second straight week of losses on Friday as fears continued to mount that the Federal Reserve’s campaign to arrest inflation would tilt the economy into a recession.

The Dow plunged 281.76 points, or 0.9%, to 32,920.46, the S&P 500 dropped 1.1% and the Nasdaq was down 1%. The Dow, which had declined more than 500 points earlier, finished the week down 1.7%.

Investors are trying to come to terms with Fed Chair Jerome Powell’s recent comments, signaling more policy tightening, and the central bank’s projection that interest rates would breach the 5% mark in 2023, a level not seen since 2007.

Adding to angst, New York Fed President John Williams said it remains possible the central bank raises rates more than it expects next year. The policymaker added that he does not anticipate a recession from the Fed’s aggressive tightening.

In addition, San Francisco Federal Reserve Bank President Mary Daly said it is “reasonable” to believe that once the Fed’s policy rates reached their peak, they could stay there into 2024.

“It feels as if finally the market is starting to understand that bad news is bad news, and that is what is starting to occur. Since the October bottoms, the market has continued to price in what I would consider a substantial amount of optimism at the fact the Fed could navigate and pilot a successful soft landing,” said Dave Wagner, equity analyst and portfolio manager for Aptus Capital Advisors in Cincinnati.

“Finally, the market is taking into consideration that bad news should mean bad things for the market.”

Money market bets show at least two 25 bps rate hikes next year and a terminal rate of about 4.9% by midyear, before falling to around 4.4% by the end of 2023. 

A fresh report showed that US business activity contracted further in December as new orders slumped to their lowest level in just over 2-1/2 years, but softening demand helped to significantly cool inflation.

“The speed at which the numbers are declining is a little bit more of a concern,” Pavlik added.

This comes after Thursday’s data indicated poor US retail sales in November, even as the labor market remained strong with the number of Americans filing for unemployment benefits falling last week.

The tech-heavy Nasdaq on Thursday closed below its 50-day moving average, a key technical level seen as sign of short-term momentum.

Market participants have largely ruled out chances of a Santa rally this year, thanks to the clamp down by major hawkish central banks. The Bank of England and the European Central Bank were the latest ones to indicate an extended rate-hike cycle on Thursday.

The simultaneous expiration of stock options, stock index futures and index options contracts later in the day, known as triple witching, could cause volatility through the trading session.

Meta Platforms jumped 2.8% after JP Morgan upgraded the stock to “overweight” from “neutral,” while Adobe gained 3% after the Photoshop maker forecast first-quarter profit above expectations.