US stocks pulled back on Friday, posting their worst weekly performance of the year as hot economic data reignited concerns about the Federal Reserve’s restrictive policies.
The S&P 500 fell 42.28 points, or 1.1%, to 3970.04. The tech-heavy Nasdaq Composite fell 195.46 points, or 1.7%, to 11394.94. The blue-chip Dow Jones Industrial Average lost 336.99 points, or 1%, at 32816.92. The three indexes all fell more than 2% in the holiday-shortened week, each having their biggest weekly declines of 2023.
The losses are the latest in a turbulent trajectory for the market. Major indices rose at the start of 2023, with many investors betting that moderating inflation could lead to the Fed cutting rates later this year, but the outlook has become clouded in recent weeks.
Investor enthusiasm has quickly waned after a series of reports showed that the US is experiencing more stubborn-than-expected inflation and a resilient economy, leaving the door open for the Fed to maintain aggressive monetary tightening measures to cool price pressures.
“The market is recalibrating and recognizing that the road to price stability is fraught with obstacles,” said Quincy Krosby, chief global strategist for LPL Financial. “The market is telling us to be cautious, with a Fed that has to beat inflation and hurt the economy to do that.”
More worry on Friday: January’s personal consumption and spending price index beat economists’ expectations. The core value excluding food and energy, considered the Fed’s preferred inflation measure, rose 4.7% year over year. That was higher than consensus forecasts for a 4.4% increase.
Short-term government bond yields, which closely track investor interest rate expectations, shot up on Friday to levels not seen in more than a decade since the release of the strong inflation data. The yield on the two-year Treasury bill rose to 4.803% on Friday, the highest since 2007.
Meanwhile, benchmark 10-year government bond yields rose from 3.879% on Thursday to 3.948% on Friday. Bond yields rise when prices fall.
Federal funds futures, used by traders to bet on interest rate developments, mirrored bets on Friday that the central bank will raise rates significantly higher than most investors expected a month ago.
“The perception of monetary policy and where it is headed has changed profoundly,” said David Donabedian, chief investment officer at CIBC Private Wealth US. “What is priced in today is more realistic than what people were pricing in right after the Fed meeting,” he said, ending Feb. 1.
Traders recently worked on the New York Stock Exchange. Equities swayed this month after a strong January.
Photo:
Michael M. Santiago/Getty Images
But with the economy proving more sustainable despite higher interest rates than many expected, some investors are growing hopeful that the Fed can contain inflation without causing too much economic pain.
“It’s not quite Goldilocks, but if we get an environment where growth holds up, which it has so far, inflation continues to come down and the Fed can ease interest rates, then that’s a pretty good environment,” said Brian O’ Reilly, head of market strategy at Mediolanum International Funds.
Boeing led the fallers in the Dow on Friday, with the share price falling $9.98, or 4.8%, to $198.15 after the aircraft maker halted deliveries of 787 Dreamliner jets over a documentation issue.
Warner Bros. Discovery shares fell 18 cents, or 1.1%, to $15.55 after the entertainment giant’s quarterly revenue beat expectations and its CEO warned that the US advertising market remains very challenging.
Shares of Carvana fell $2.07, or 21%, to $8.01 after the online used-car retailer reported larger-than-expected quarterly losses and sales that beat analyst estimates
First-month Brent crude futures contracts rose 1.2% to $83.16 a barrel. The international oil benchmark fell this month as a surge in US crude inventories raised concerns that demand for oil in the world’s largest economy is stagnating.
Overseas Asian indices were mixed. In Japan, the Nikkei 225 rose 1.3% after the candidate to head the Bank of Japan said inflation, now at a four-decade high, would fall quickly without a rise in interest rates. In Hong Kong, the Hang Seng index fell 1.7%, while China’s Shanghai Composite lost 0.6%.
European markets were generally lower. The pan-continental Stoxx Europe 600 lost 1%.
Write to Will Horner at william.horner@wsj.com
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