Stocks crash as omicron, rate worries rock Wall Street

NEW YORK (AP) – Already pissed off by the latest variant of the coronavirus, Wall Street losses worsened on Tuesday after the Federal Reserve chief said he would consider ending his support for financial markets earlier than planned.

The S&P 500 was down 1.3% in afternoon trading after Fed Chairman Jerome Powell told Congress the central bank could stop the billions of dollars in bond purchases it makes every month “maybe a few months earlier”. He was on track to complete the purchases, intended to boost the economy by lowering rates on mortgages and other long-term loans, in June.

Ending the purchases would open the door for the Fed to raise short-term interest rates from their all-time high of near zero. This in turn would dilute a major propellant that sent inventory to record highs and allay concerns about an overpriced market. As investors raised expectations for the Fed’s first rate hike following Powell’s remarks, yields on short-term Treasuries rose.

Stock losses accelerated as the Dow Jones Industrial Average fell more than tripled in half an hour. It was down 486 points, or 1.4%, to 34,649 at 2:18 p.m. EST.

The Nasdaq composite was down 1.3% after holding up better than the rest of the market. Higher interest rates tend to hurt stock prices overall, but they hit hardest those who are considered the most expensive or those who focus the most on profit growth in the future. These companies play a bigger role in the Nasdaq than the other indices.

The blow to interest rates came after stocks were already weak in the morning amid concerns over the severity of the fast-spreading omicron variant of the coronavirus could hit the global economy.

Moderna’s CEO predicted in an interview with the Financial Times that existing COVID-19 vaccines may be less effective with omicron than previous variants. Regeneron also said on Tuesday that its monoclonal antibody treatment may have reduced effectiveness on omicron.

Much remains to be seen on the variant, including how much it can slow down already gutted supply chains or scare people out of stores. This uncertainty has sent Wall Street through jagged top-to-bottom jerks as investors struggle to limit the economic damage Omicron will eventually cause.

“There will be increased volatility around any news,” said Kristina Hooper, chief global markets strategist at Invesco. She said the markets would likely remain cautious “until we find out more.”

The S&P 500 fell 2.3% on Friday for its worst loss in February, only to rise 1.3% on Monday as investors reconsidered whether the reaction was overdone, before giving way to the loss of Tuesday.

A measure of stock market nervousness jumped nearly 16% after approaching its level on Friday, when it hit its highest level since March. Much of the increase occurred after Powell started speaking.

Gold generally does well when investor fear increases, but its price has fallen 0.4%. Higher interest rates could reduce the attractiveness of gold, which pays no interest to its holders.

Crude oil prices have fallen with fears that a global economy weakened by the omicron will use less fuel. Benchmark US crude fell 5.1% to its lowest level in three months. Brent crude, the international standard, fell 5.9%.

If omicron ends up causing heavy damage to the global economy, it could put the Federal Reserve in a difficult position. Usually, the central bank will lower interest rates, which encourages borrowers to spend more and investors to pay higher prices for stocks.

But low rates can also encourage inflation, which is already high across the global economy. Powell acknowledged in his testimony to Congress that inflation has been worse and has lasted longer than the Fed expected. For months, officials have described inflation as only “transient,” but Powell said that word no longer worked.

The subsequent losses for stocks on Tuesday were widespread, with nearly 95% of large S&P 500 stocks falling.

Small stocks fell even further, with the Russell 2000 Index falling 1.8%. Investors generally see them hit harder than their bigger rivals by both higher interest rates and a weaker US economy.

A signal in the bond market also showed some concern about the outlook for the economy. Longer-term T-bills generally offer higher yields than shorter-term T-bills, in part to offset the increased risk that future inflation could eat away at their yields.

A 10-year Treasury still offers more yield than a two-year Treasury, but the gap narrowed sharply on Tuesday. The two-year yield rose to 0.52% from 0.51% on Monday night. The 10-year yield, meanwhile, fell to 1.44% from 1.52%.

Many investors see this reduced spread to mean that the bond market has less confidence in the long-term strength of the economy. If this were to reverse, with short-term returns exceeding long-term returns, many investors would see it as a semi-reliable predictor of a recession.

Comments are closed.