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Equity markets continued their week-long plunge on Friday, with all three major indices falling more than 1% as investors who lost confidence in the global economy raced for the exits.
Wall Street has developed a bleak picture of the economy’s future, where a recession looks more likely as it processes warnings from the Federal Reserve about what it will take to cool the country’s overheated inflation.
The Dow fell more than 486 points, or 1.6%, to close at 29,590 on Friday, its lowest point in nearly two years. The Dow fell 4% over the week and also closed 19.59% from its most recent peak in January, pushing it to the 20% bear market demarcation line.
The Nasdaq and the S&P 500 have now both entered bear markets. The Nasdaq fell 1.8% to 10,868, or 32.3% below its most recent peak 10 months ago. The S&P fell 1.72% to 3,693, down 23% from its January peak.
Equity markets, as well as those for bonds and commodities, have anticipated the Fed’s announcement this week that it will continue to raise interest rates until inflation is under control, regardless of the risks of a recession.
Already this year, the central bank has been raising interest rates at a rate and magnitude not seen in a generation, hoping to slow down the worst inflation the country has experienced in 40 years.
Most Americans have hoped for a ‘soft landing’, in which the Fed’s measures to stabilize prices would lead to only a slight economic slowdown. But Fed Chair Jerome Powell made it clear on Wednesday that the economy could face the “hard landing” of a serious downturn.
“Nobody knows if this process will lead to a recession and, if so, how big that recession would be,” Powell said at a news conference after the Fed announced it would raise interest rates by 0.75% for the third time in a row.
“Nevertheless, we are committed to bringing inflation back to 2% because we believe that failing to restore price stability would mean much more pain later on.”
Powell’s comments and the bleak outlook from FedEx, the multinational company heavily linked to the world’s supply chains, has left some confusion about the future, with Goldman Sachs analyst David Kostin describing the economic outlook as “unusually murky.”
“The forward paths of inflation, economic growth, interest rates, earnings and valuations are all in flux,” Kostin wrote Friday.
“Based on our client discussions, a majority of equity investors believe that a hard landing scenario is inevitable and their focus is on the timing, magnitude and duration of a potential recession and investment strategies for that outlook,” he also wrote. .