Stocks fall as recession fears grow, marking 2nd straight weekly loss

Stocks ended lower on Wall Street as worries grow that the Federal Reserve and other central banks are willing to bring on a recession if that's what it takes to get inflation under control. 

The S&P 500 fell 42 points, or 1.1%, to 3,854 Friday, closing out its second straight weekly loss. The Dow Jones Industrial Average fell 281 points, or 0.8%, to 32,920, while the Nasdaq fell nearly 1%. The Fed this week raised its forecast for how high it will ultimately take interest rates, dashing some investors' hopes that rate cuts may happen next year. 

The losses were broad. More than 90% of companies in the benchmark S&P 500 fell. Technology and health care stocks had some of the biggest losses. Microsoft fell 1.9% and Pfizer slid 3.3%.

Fed dashes hopes of softer rate hikes

The Fed on Wednesday ended its final meeting of the year by raising its short-term interest rate by half a percentage point, its seventh straight increase this year. That has disappointed investors who hoped recent signs that inflation is easing would persuade the Fed to lighten up on the brakes it is applying to the U.S. economy. Wall Street had been hoping that the central bank would signal an easing of rate increases heading into 2023, but the Fed instead has signaled the opposite.

"The FOMC on Wednesday provided clear indications that it does not believe it has accomplished its mission to restore price stability," Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a research note. "Thursday's comments from a wider range of top officials indicate that other central bankers also believe that more tightening is needed," he added.

The federal funds rate stands at a range of 4.25% to 4.5%, the highest level in 15 years. Fed policymakers forecast that the central bank's rate will reach a range of 5% to 5.25% by the end of 2023. Their forecast doesn't call for a rate cut before 2024.

"U.S. stocks are declining as investors can't shake off all the hawkish rhetoric that came from central bankers this week and as the private sector clearly entered a strong downturn," wrote Edward Moya, senior market analyst at OANDA, in an email. "Recession risks will only grow now that [Federal Reserve Chairman Jerome] Powell has signaled that we should expect 'ongoing increases.'"

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Other analysts anticipate more disagreement on the correct approach to lowering inflation over the next year. 

"In terms of monetary policy, the softer-than-expected CPI prints in October and November will likely lead to a more heated debate around the path for monetary policy in 2023. That said, we think the emphasis on cooling off the labor market and on core services ex housing services will keep the Fed on track to hike by 50bp in February and 25 bp in March resulting in a terminal rate of 5.0-5.25%," Bank of America Global Research analysts said in a report.

Recession fears grow

"Inflation continues to be the monster in the room," said Liz Young, head of investment strategy at SoFi.

Inflation has been easing from its hottest levels in decades, but remains painfully high. That has prompted the Fed to maintain its aggressive attack on prices by raising interest rates to slow economic growth. The strategy increasingly risks slamming on the brakes too hard and sending an already slowing economy into a recession.

"Whether it's a mild, medium, or deep recession is still unknown," Young said.

A mixed report from S&P Global on Friday highlighted the recession risk. It showed that business activity slowed more than expected this month as inflation squeezes companies. It also noted that it was the sharpest drop since May of 2020, but that inflation pressures have also been easing.

"In short, the survey data suggest that Fed rate hikes are having the desired effect on inflation, but that the economic cost is building and recession risks are consequently mounting," Chris Williamson, chief business economist at S&P Global Market Intelligence, said.

Bond yields were mostly lower. The yield on the 10-year Treasury, which influences mortgage rates, rose to 3.47% from 3.45% late Thursday. The yield on the two-year Treasury, which closely tracks expectations for Fed moves, fell to 4.17% from 4.24% late Thursday.

Europe's rate hikes, China's COVID battle

The latest wave of selling came after central banks in Europe raised interest rates a day after the U.S. Federal Reserve did the same, emphasizing that interest rates will need to go higher than previously expected in order to tame inflation.

Like the Fed, central bank officials in Europe said inflation is not yet corralled and that more rate hikes are coming. The European Central Bank, Bank of England, and Switzerland's central bank all pushed through half-point rate hikes on Thursday.

"We are in for a long game," European Central Bank President Christine Lagarde said at a news conference Thursday.

On Thursday, the S&P 500 fell 2.5%, the tech-heavy Nasdaq composite lost 3.2% and the Dow gave back 2.2%. Barring a strong reversal, major indexes will finish with losses for the second straight week.

In Asia, China's move to relax COVID-19 restrictions has boosted hopes for an end to massive disruptions from lockdowns and other strict measures to prevent infections. But signs of sharply rising case numbers have raised uncertainty, with some alarmed over the possibility that the pandemic will continue to drag on the economy.

"Tight financial conditions and China's biggest COVID-19 outbreak yet mean global economic growth will slow further in the first quarter of next year, dragging most commodity prices lower," said Caroline Bain, chief commodities economist at Capital Economics. 

"The slowdown will be accompanied by investor risk aversion, which will further undermine commodity prices. However, as global activity growth starts to recover from around the second quarter, we expect improved commodity demand growth and investor risk appetite to push prices higher," she said.

Inflation fight continues

The central bank has been fighting to lower inflation at the same time that pockets of the economy, including employment and consumer spending, remain strong. That has made it more difficult to rein in high prices on everything from food to clothing.

On Thursday, the government reported that the number of Americans applying for unemployment benefits fell last week, a sign that the labor market remains strong. Meanwhile, another report showed that retail sales fell in November. That pullback followed a sharp rise in October.

In other trading Friday, benchmark U.S. crude oil lost $1.79 to $74.32 a barrel in electronic trading on the New York Mercantile Exchange. It lost $1.17 on Thursday to $76.11 per barrel.

Brent crude, the pricing basis for international trading, shed $1.90 to $79.31 per barrel.

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