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Wall Street slammed as recession worries mount; S&P 500 sinks 3%

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US stock tumbled on Thursday, with growth shares bearing the brunt of the selloff, after the Federal Reserve’s largest rate increase in nearly 30 years to combat decades-high inflation fanned worries of a recession.

The rally that followed the US Fed’s decision fizzled out, with the S&P 500 down 3%, on pace for its lowest since December 2020. 

All of the 11 major S&P sectors fell in morning trade. Energy and consumer discretionary sectors were the top losers, down 4.2% and 3.6%, respectively.

Mega-cap growth firms Amazon.com, Microsoft, Apple and Tesla slid between 2.5% and 6%, also pressured by rising US Treasury yields.

Kroger Co plunged after the supermarket company said higher costs hurt margins. Revlon filed for Chapter 11 bankruptcy as the supply-chain crunch proved the tipping point for the debt-laden cosmetics giant.

Among major US banks, Morgan Stanley led losses with a 4% slide.

By 09:56 am ET, all the Dow components were in the red, while 496 constituents of S&P 500 index fell.

At 9:56 am ET, the Dow Jones Industrial Average was down 692.04 points, or 2.26%, at 29,976.49 and the Nasdaq Composite was down 355.94 points, or 3.21%, at 10,743.21.

Treasury two-year yields resumed their swift increase, rising as much as 20 basis points to 3.39% Thursday. They later pared the advance by half after weak housing data underscored how higher rates are slowing the real-estate market. Mortgage rates in the US surged the most since 1987.

Declaring that it’s essential to tame inflation, Jerome Powell engineered the biggest rate increase since 1994 Wednesday and held out the distinct possibility of another jumbo hike in July. While the Fed chief sought to soften the blow of the 75-basis-point boost by saying he didn’t expect moves of that size to become the norm, he effectively admitted the chance of an economic downturn.

“Our main takeaway from the Fed is hawkish — meaning the Fed is going to accept recession risk to deliver below-trend economic growth,” wrote Dennis DeBusschere, the founder of 22V Research.

The S&P 500 now implies an 85% chance of a US recession amid fears of a policy error by the Fed, according to JPMorgan Chase & Co. The warning from quant and derivatives strategists is based on the average 26% decline for the gauge during the past 11 recessions and follows its collapse into a bear market amid concerns about surging inflation and aggressive rate hikes.

“The market got what it wished for, but maybe, just maybe, hiking 75 bps into a rapidly weakening economy isn’t the best idea,” said Peter Tchir, head of macro strategy at Academy Securities.

“Despite their assurance, it’s unclear to me whether the Fed has the tools they say they do to tamp down prices,” said Jason Brady, chief executive officer at Thornburg Investment Management.

“The band-aid wasn’t ripped off and, if anything, greater uncertainty about the magnitude of next moves has increased,” said Neil Campling, head of tech, media and telecom research at Mirabaud Securities

Elsewhere, investors dumped European bonds and the franc rallied after a surprise Swiss rate hike. The pound rose as the Bank of England raised interest rates by a quarter-percentage point today, shrugging off pressure for a bolder move to combat price increases that have pushed inflation to a 40-year high.

The bank’s monetary policy committee voted 6-3 to boost its key rate to 1.25%, with the dissenters supporting a larger half-point increase.

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