Wall St tumbles as investors fret on rate hikes and recession

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By David French

(Reuters) - Wall Street's main indexes all tumbled to close well down on Friday, as rattled investors continued to reposition themselves amid fears the U.S. Federal Reserve's hawkish rate policy will help tip the American economy into recession.

The Dow narrowly avoided ending more than 20% lower than its Jan. 4 record all-time closing peak of 36,799.64 points, meaning the blue-chip index did not attain a bear market label, according to a widely used definition.

The S&P 500 and the Nasdaq are already in a bear market.

After enjoying hefty gains for last two years, Wall Street has been rocked in 2022 by worries about a host of issues including the Ukraine conflict, the energy crisis in Europe, China's COVID-19 flare ups, and tightening financial conditions across the globe.

A half dozen central banks, including in the United States, Britain, Sweden, Switzerland and Norway, delivered rate hikes this week to fight inflation, but it was the Fed's signal that it expects high U.S. rates to last through 2023 that caught markets off guard.

"There had been some optimists out there saying that inflation may be coming under control but the Fed effectively told them to sit down and shut up," said David Russell, VP of market intelligence at TradeStation Group.

"The Fed is trying to rip the band-aid off, trying to kill inflation while the jobs market is still strong."

Dire outlooks from a handful of companies have also added to woes in a seasonally weak period for markets. Having withdrawn its earnings forecast last week, FedEx Corp (NYSE:FDX) outlined on Thursday cost cuts of up to $2.7 billion after falling demand hammered first-quarter profits.

The delivery giant's stock slumped in Friday trading.

The S&P 500's estimated earnings growth for the third quarter is at 4.6% down from 5% last week, according to Refinitiv data.

Goldman Sachs (NYSE:GS) cut its year-end target for the benchmark S&P 500 index by about 16% to 3,600 points.

"We're having everyone reassess exactly how far the Fed will go, and that's troubling for the economy," said Ed Moya, senior market analyst at OANDA.

"It's becoming the base case scenario that this economy is going to have a hard landing, and that is a terrible environment for U.S. stocks."

According to preliminary data, the S&P 500 lost 62.49 points, or 1.69%, to end at 3,694.32 points, while the Nasdaq Composite lost 193.70 points, or 1.75%, to 10,873.10. The Dow Jones Industrial Average fell 473.55 points, or 1.57%, to 29,603.13. 

All three indexes also recorded sharp weekly losses.

All the 11 major S&P sectors declined, led by a slide in energy shares. Oil and gas-related stocks were pummeled by the decline in crude prices, which fell in response to concerns about demand in a recessionary environment and the strong U.S. dollar. [O/R]

Oilfield services were particularly hit, with Halliburton (NYSE:HAL) Co, Schlumberger (NYSE:SLB) and Helmerich and Payne Inc slumping.

Rate-sensitive technology and growth stocks dropped with Alphabet (NASDAQ:GOOGL) Inc, Apple Inc (NASDAQ:AAPL), Amazon.com (NASDAQ:AMZN), Microsoft Corp (NASDAQ:MSFT) and Tesla (NASDAQ:TSLA) Inc all fell.

Shares of Costco Wholesale Corp (NASDAQ:COST) dropped after the big-box retailer reported a fall in its fourth-quarter profit margins.

The CBOE volatility index, also known as Wall Street's fear gauge, rose to a three-month high.