Wall Street drops to lowest since 2020 as fear returns

By DAMIAN J. TROISE, STAN CHOE and ALEX VEIGA AP Business Writers

NEW YORK (AP) — Stocks fell sharply on Wall Street on Thursday as worries about a possible recession and rising bond yields put pressure back on markets.

The S&P 500 fell 2.1% to its lowest level since the end of 2020. The washout erased the index’s gains in a big rally the day before. It was then that the Bank of England’s aggressive measures to rein in the sudden surge in UK yields sent a wave of global relief among investors.

The Dow Jones Industrial Average fell 1.5% and the Nasdaq composite lost 2.8%. The Russell 2000 Small Business Index fell 2.4%.

Major indexes are poised for a weekly loss to wrap up what has been a dismal month for Wall Street. With one day left in September, the benchmark S&P 500 is down about 8% for the month.

For markets to truly rally, after US stocks lost more than 20% of their value this year, analysts say investors will need to see a pause in the high inflation that has swept the world.

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That has yet to happen, with even more data arriving Thursday showing otherwise. And that means the Federal Reserve and other central banks will likely continue to raise interest rates to slow their economies in hopes of lowering inflation. In doing so, they also risk recessions if they go too far.

“The economy doesn’t seem to be easing if you look at the jobs data,” said Brad McMillan, chief investment officer for Commonwealth Financial Network. This undermines any investor hoping that a weakening economy might convince the Fed to cut interest rates.

The selloff was widespread on Thursday, with more than 90% of S&P 500 stocks ending in the red. The index fell 78.57 points to 3,640.47.

The Dow lost 458.13 points to close at 29,225.61, and the Nasdaq slipped 314.13 points to 10,737.51. The Russell 2000 finished down 40.31 points at 1,674.93.

Stocks fell as Treasury yields climbed and added pressure to markets. The 10-year Treasury yield rose to 3.77% from 3.73% on Wednesday night. It was above 3.85% in morning trading.

The two-year Treasury yield, which more closely tracks expectations of Fed moves, rose more aggressively to 4.20% from 4.14%.

A stronger-than-expected report from the U.S. jobs market bolstered expectations that the Fed would continue to raise rates and keep them high for some time, potentially into 2023.

Fewer workers applied for unemployment benefits last week than expected by economists. This is good news for workers in general and an indication that layoffs are not widespread despite concerns about the economy. But it also keeps upward pressure on inflation, giving the Fed yet another reason to keep rates high.

The central bank’s benchmark overnight interest rate has already climbed into a range of 3% to 3.25%, up from virtually zero as recently as March. This is its highest level since 2008, and the Fed is expected to raise it by at least another percentage point by early 2023.

Rate hikes have a notoriously long lag before they reach the whole economy. But they are already causing big problems for the housing sector, where the average rate on a 30-year fixed mortgage has more than doubled in the past 12 months to 6.70%.

Higher interest rates not only invite the possibility of a recession, but they also depress stock prices and other investments, regardless of how the economy is doing. Investments considered the most expensive or riskiest are usually the hardest hit.

Economic reports elsewhere in the world have also bolstered expectations of higher rates ahead. In Germany, for example, a reading on inflation came in hotter than expected.

In the UK, meanwhile, Prime Minister Liz Truss defended her plan to cut taxes even though critics said it would make inflation worse. The plan had sent UK bond yields soaring, forcing the Bank of England on Wednesday to commit to buying the number of UK government bonds needed to cut yields. The bond-buying announcement came just before the central bank planned to do the opposite and sell some of the bonds it bought earlier to support the economy.

Even beyond concerns about central banks and rates, many other worries continue to hang over the markets.

A supercharged U.S. dollar has climbed so fast against other currencies that investors fear something is breaking somewhere in global markets. Europe’s already struggling economy appears to be facing increased pressure from high energy prices amid accusations that someone deliberately damaged pipelines carrying gas from Russia to Germany. And in the United States, investors fear that one of the key levers fixing stock prices is under threat as corporate profits falter under higher interest rates, a slowing economy and high inflation.

CarMax, the auto seller, plunged 24.6% for the S&P 500’s biggest loss after reporting weaker-than-expected profit for the three months through August. He said the used-car market is generally tough, as higher interest rates make getting car loans more expensive.

AP writers Joe McDonald, Jill Lawless and Danica Kirka contributed to this report. Veiga reported from Los Angeles.

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