Shares on Wall Street fell on Thursday, with the tech-heavy Nasdaq Composite taking losses from its all-time high to nearly 13% as the prospect of higher interest rates drove investors out of stocks.
The Nasdaq index ended the day down 1.3%. It is now down 12.7% from the record high set in November. The index earlier this week fell into a technical correction. This happens when it falls more than 10% from a high.
The blue-chip S&P 500 stock index fell 1.1% on Thursday and is now 7% below a peak reached this month.
Among the stocks that saw the biggest losses, fitness equipment maker Peloton fell 24% as CNBC announced that it would temporarily stop manufacturing new bicycles and treadmills due to declining demand. Shares of Netflix also fell in after-hours trading, slipping 13% after the company said subscriber growth would fall below Wall Street expectations.
US equities have been under pressure since the start of the year, with investors betting that to fight inflation the Federal Reserve will have to raise interest rates at a faster pace and on a larger scale than expected.
Higher interest rates increase the cost of borrowing for companies, which can be problematic for loss-making groups that do not yet have the margins to absorb the rise in rates.
But there’s another problem for many loss-making but fast-growing companies in the tech industry. Valuations across the sector have been supported by low and negative Treasury yields, which are used by investors to gauge profits that will not be generated for many years. As Treasury yields rise, the relative attractiveness of these future earnings declines, which in turn weighs on investor demand for the stocks of these companies.
A closely-tracked Goldman Sachs index of loss-making tech groups has fallen 18% so far this year.
Minutes from the U.S. central bank’s December meeting released in early January showed its officials had become more willing to raise borrowing costs. The futures market is currently pricing in four quarter-point rate hikes this year, with the first scheduled for March.
At its two-day policy meeting next week, the central bank could also provide an update on plans to shrink its $9 billion balance sheet and the continued reduction in purchases of Treasuries and backed bonds. to mortgages.
“I don’t necessarily think the worst is over (for equities). . . I think the Fed will accelerate the cut next week,” said Andy Brenner, head of international fixed income at NatAlliance Securities.
In government debt markets, the yield on the 10-year Treasury note, which underpins global borrowing costs and equity valuations, fell 0.05 percentage points to 1.82%. The two-year yield, which closely tracks monetary policy expectations, fell 0.02 percentage points to 1.04%. Yields fall when prices rise.
European stock markets faltered on Thursday, with the regional Stoxx 600 index ultimately closing up 0.5%.
The Nasdaq Golden Dragon Index, a collection of Chinese companies listed in the United States, gained 2.2% on Thursday after China cut its prime rates on one- and five-year loans. This will lower financing costs for mortgage borrowers and small businesses as the country’s economic growth has slowed to its slowest pace in 18 months.
Beijing’s move also eased market nerves that had been building up ahead of the Fed’s monthly meeting next week.
Hong Kong’s Hang Seng index rose 3.4% in response to lending rate cuts in China. Tokyo’s Nikkei 225 index closed up 1.1%.
“The markets fell quite violently,” said Axel Botte, strategist at fund management group Ostrum. “The developments in China are therefore useful and a stabilizing force on a global scale.”
Brent crude, the international oil benchmark, stabilized around $88.38 a barrel after hitting its highest level since 2014 earlier in the day.