Stocks have their worst day in two months
Stocks had their worst day in two months Wednesday after the Federal Reserve raised interest rates on the back of a strengthening job market and surprised investors by increasing its forecast for rate hikes next year. The dollar’s value jumped against other currencies, and bond yields climbed to their highest levels in years.
The rate increase, which was only the Fed’s second in the last decade, was widely expected. But investors were surprised to see the Fed project three more increases for 2017, up from a prior forecast of two. Higher rates can slow corporate profits and economic growth.
Read more: Fed inches up key interest rate, a ‘vote of confidence in the economy’ »
The Standard & Poor’s 500 index fell 18.44 points, or 0.8%, to 2,253.28, its biggest percentage loss since mid-October. The Dow Jones industrial average fell 118.68 points, or 0.6%, to 19,792.53. The Nasdaq composite fell 27.16, or 0.5%, to 5,436.67.
The yield on the 10-year Treasury note touched its highest level in more than two years and sat at 2.57% late Wednesday, up sharply from 2.47% a day earlier. Bond yields have been in an upward trend for the last month, and the yield on the two-year Treasury reached its highest level since summer 2009. It was trading at 1.27% late Wednesday, up from 1.17%.
The dollar jumped more than 1% against several of its rivals, including the euro and the Japanese yen.
Analysts said investors shouldn’t panic about the prospect for more increases for interest rates, which are still very low by historical standards.
Plus, the Fed doesn’t always do what it projects it will. “Remember that last year, they said they would increase rates four times,” said Rich Taylor, client portfolio manager at American Century. “Then they said two, and then by June, it was one.”
Inflation expectations have climbed since Donald Trump’s surprise victory in last month’s presidential election, but inflation still remains relatively tame. That’s part of why Taylor continues to expect only a gradual rise in interest rates.
Investors reacted to the Fed’s announcement Wednesday by selling stocks that would be most hurt by higher interest rates.
Dividend-paying stocks had been big winners in recent years as investors turned to them in search of income given record-low bond yields. The worry is that traditional bond investors who had defected to dividend stocks will return to bonds now that yields are rising again.
Utility stocks in the S&P 500 fell 2%, and real-estate stocks fell 1.9%.
Energy stocks had the sharpest declines among the 11 sectors that make up the S&P 500: They fell 2.1%, dropping along with the price of oil. Benchmark U.S. crude fell $1.94 to settle at $51.04 per barrel. Brent crude, the international standard, fell $1.82 to $53.90 a barrel.
Four stocks fell for every one that rose on the New York Stock Exchange.
Wells Fargo was one of the decliners. It dropped 2% to $54.70 after federal regulators placed restrictions on the bank due to concerns about its “living will,” which lays out its plan of action in the event of a failure.
Hertz Global Holdings sank 8.3% to $23.04 after the struggling car rental company named a new chief executive. The company’s three longest-serving directors will also leave the board next month.
Among the day’s few gainers was Neustar, which leaped 21% to $33.45 after a group of private investors said it would buy the communications company for $33.50 a share in cash.
In Europe, Britain’s FTSE 100 stock index slid 0.3%, while Germany’s DAX fell 0.4% and France’s CAC 40 lost 0.7%.
In Asia, Japan’s Nikkei 225 finished nearly unchanged. South Korea’s Kospi and Hong Kong’s Hang Seng index were up marginally.
Natural gas rose nearly 7 cents to $3.54 per 1,000 cubic feet. Wholesale gasoline fell nearly 2 cents to $1.53 a gallon.
Gold rose $4.70 to $1,163.70 an ounce. Silver rose 24 cents to $17.22 an ounce, and copper rose less than a penny to $2.60 per pound.
The dollar climbed to 116.37 Japanese yen from 115.23 yen. The euro fell to $1.0557 from $1.0622. The British pound fell to $1.2596 from $1.2667.
UPDATES:
2:30 p.m.: This article was updated with closing prices, context and analyst comments.
11:40 a.m.: This article was updated after the Federal Reserve announcement with market prices and context.
8:35 a.m.: This article was updated throughout with market prices and context.
This article was originally published at 7 a.m.
