Fed's warning sends DJ stocks plummeting

March 08, 2023 (MLN): The Dow Jones Industrial Average experienced a significant drop of nearly 600 points On Tuesday, following Federal Reserve Chair Jerome Powell's announcement that the central bank may increase interest rates more than previously expected to combat inflation and cool down the economy.

The blue-chip index fell by 1.7%, while the S&P 500 dropped by 1.5%, and the tech-heavy Nasdaq Composite retreated by 1.2%.

This broad decline was felt across all 11 sectors of the S&P 500 and impacted the stocks of banks, particularly sensitive to rising rates. The financial sector experienced its worst day since September, with Wells Fargo's shares dropping by 4.7% and M&T Bank's shares falling by 5.2%. The yield on two-year Treasury notes reached 5.011%, its highest close since 2007, reflecting investors' expectations of future Fed rate increases.

Powell's comments have raised concerns among investors about the potential for further rises in borrowing costs, which could discourage investment. While the S&P 500 has seen a modest increase of 0.4% this month, extending its gains for the year to 3.8%, some investors are cautious about the possibility of higher interest rates in the coming months.

The Fed raised its benchmark federal funds rate by a quarter-percentage-point in February, and some investors now anticipate an acceleration in rate increases to cool down the labor market and overall inflation. Traders in interest-rate futures expect the federal funds rate to reach as high as 5.6% in October and hover around 5.5% at year-end.

The shift in sentiment in recent weeks has led some investors to reassess their strategies for the year ahead. Joseph Little, Chief Strategist at HSBC Asset Management, warned that stocks and corporate bonds appear expensive given how high-interest rates are heading and a likely downturn in company profits.

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