The major averages dropped sharply on Friday, with the Dow Jones Industrial Average posting its worst weekly loss since October, as traders worried the Federal Reserve could start raising rates sooner than expected. Economic comeback plays led the market sell-off. The blue-chip average dropped 533 points, bringing its week-to-date losses to 3.1%. The S&P 500 fell 5 points or 1.31%, pushing its loss this week to more than 1.5%. The tech-heavy Nasdaq Composite declined 130 points or 0.92%.
St. Louis Federal Reserve President Jim Bullard told CNBC's "Squawk Box" it was natural for the Fed to tilt a little "hawkish" this week and that the first rate increase from the central bank would likely come in 2022. His comments came after the Fed on Wednesday added two rate hikes to its 2023 forecast and increased its inflation projection for the year, putting pressure on stock prices.
Pockets of the market most sensitive to the economic rebound led the sell-off this week.
The S&P 500 energy sector and industrials are down 4.5% and 3.3%, respectively, week to date. Financials and materials meanwhile, are down more than 5% each. These groups had been market leaders this year on the back of the economic reopening.
The decline in stocks came as the Fed's actions caused a drastic flattening of the so-called Treasury yield curve. This means the yields of shorter-duration Treasuries — like the 2-year note — while longer-duration yields like the benchmark 10-year declined. The retreat in long-dated bond yields reflects less optimism toward economic growth, while the jump in short-end yields shows the expectations of the Fed raising rates.
This phenomenon is hurting bank stocks particularly as bank earnings could take a hit when the spread between short-term and long-term rates narrows. Bank of America and JPMorgan Chase shares on Friday lost more than 2% each. Citigroup fell by 1.7% and was headed for its 12th straight daily decline.
Fed Chairman Jerome Powell said Wednesday that officials have discussed tapering bond buying and would at some point begin slowing the asset purchases.
Commodity prices have been under pressure this week as China attempts to cool rising prices and the U.S. dollar strengthens. Copper, gold and platinum fell once again on Friday.
Friday also coincided with the quarterly "quadruple witching" in which options and futures on indexes and equities expire. Many expected trading to be more volatile in light of this event.
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