Stocks Slump as Fed Rally Fades

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The stock market is tumbling Thursday as pessimism replaces optimism following the Federal Reserve’s three-quarter point rate increase—and the possibility it could drive the economy into recession.

Dow Jones Industrial Average
futures have fallen 533 points, or 1.7%, while

S&P 500
futures have dropped 2.1%, and

Nasdaq Composite
futures have declined 2.6%. All three major indexes gained at least 1% Wednesday. The 10-year Treasury yield has risen 0.053 percentage point to 3.448%, as bond prices fall.

“Stock futures are down …as investors digest the latest central bank decisions, a rebound in rates and recession fears,” writes Tom Essaye, founder of Sevens Report Research. 

Yesterday’s increase wasn’t unexpected, and neither was its size. Inflation has not declined, Treasury yields have soared, and the stock market has plunged, with the S&P 500 in a bear market, defined as a 20% drop. So when the Fed delivered a rate hike in line with expectations, the market rallied. 

But this most recent rate hike isn’t the end of the story—and markets taking are now talking note of that. The Fed’s projected rate hikes looking ahead would bring the benchmark lending rate up to 3.75% by the end of 2023. That’s bringing the 2-year Treasury yield, which attempts to forecast the level of the benchmark lending rate a couple of years from the present, up to 3.34%, up from Wednesday’s close and just under a multiyear high. 

The point is that the Fed keeps having to plan more rate hikes in order to reduce economic demand and inflation, and markets need to reflect that. The ultimate fear is that the Fed puts the economy into a recession. To be sure, Fed chair Jerome Powell said that the Fed hopes to become data dependent soon. That means the central bank will closely monitor how quickly economic growth and inflation decline and just how much tightening is needed.

But that’s a story for another day, as far as markets are concerned. “The positive spin from Powell is gone,” writes NatAlliance Securities’ Andrew Brenner. 

Overseas, the Bank of England raised interest rates for the fifth straight time, by 25 basis points to 1.25% on Thursday, and the Swiss National Bank surprised with a rate hike of 50 basis points, its first increase in 15 years. The Europe Stoxx 600 is down 2%.

Here are some other stocks on the move Thursday:

Twitter

(ticker: TWTR) shares have risen 2.4% in premarket trading with Elon Musk expected to confirm his desire to follow through with his $44 billion acquisition of the social media company on Thursday at an all-hands meeting of employees.

Tesla

(TSLA) has fallen 3.9% early Thursday. The electric-vehicle company, where Musk serves as chief executive, raised care prices. Also, analysts at Jefferies cut sales estimates for electric-vehicle makers for this year and next.

Boeing

(BA) was down 0.9% despite an upgrade to Buy at Citi.

Amazon.com

(AMZN) has fallen 2.8% in premarket trading. It announced that Prime Day would occur on July 12 and 13.

Write to Joe Woelfel at joseph.woelfel@barrons.com