S&P 500, Dow and Nasdaq drop on recession fear, watch 10-year Treasury to signal the end

Wall Street stocks plunged after a handful of central banks around the world followed the Federal Reserve and raised interest rates to stymie soaring inflation.

The Standard & Poor’s 500 index, already in a bear market (defined as at least 20% below its record high), closed down 123.22 points, or 3.25%, at 3,666.77.

The Nasdaq, the first index to drop into bear market territory earlier this year, ended down 453.06 points, or 4.08%, at 10,646.10.

The Dow ended down 741.46 points, or 2.4%, at 29,927.07, narrowly escaping a bear market again but analysts say it’s likely just a matter of time before the Dow will fall, too.

“The S&P 500 and Dow often are different over a short period, but over time they correlate well,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said.

Taiwan’s central bank raised its benchmark discount rate by 12.5 basis points to 1.5% and lowered its economic growth outlook for the year.

In Europe, the Bank of England lifted its key rate by 25 basis points to 1.25%, while delivering more sour news. It warned inflation will soar to at least 11% this autumn (from 9% in April) when the cap on energy bills is next lifted, and that the UK economy will shrink by 0.3% this quarter.

The shocker was the Swiss National Bank, which increased its policy rate to -0.25% from  -0.75%, the first hike since September 2007.

All of this is on the heels of the Fed’s 75-basis-point increase in the benchmark fed funds rate late Wednesday. That was the largest increase since November 1994, meant to raise borrowing costs to dampen demand and rein in the highest consumer inflation rate in 40 years.

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Trader Peter Tuchman works on the floor of the New York Stock Exchange as stocks are opening broadly lower on Wall Street as traders worry about the impact on companies of a slowdown in China’s economy.

Housing market slowdown

The housing market, which was red-hot during the pandemic era of near-zero rates, is reeling from the effects of higher U.S. rates.

U.S. housing starts declined 14.4% last month to a 1.55 million annualized rate, the lowest in more than a year and the largest one-month decline since April 2020, government data showed. Applications to build also fell to an annualized 1.7 million units, the lowest since September. These suggest pressure on housing construction as higher rates take their toll on demand.

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Average long-term U.S. mortgage rates had their biggest one-week jump in 35 years after the Fed’s supersized rate hike on Wednesday. The average 30-year, fixed-rate mortgage rate spiked by 55 basis points to 5.78% for the week ending Thursday, June 16 from 5.23%, according to Freddie Mac.

“To put that figure into perspective, a $300,000, 30-year, fixed-rate mortgage with a rate of 5.23% would cost a borrower about $1,653 a month (excluding other costs like taxes and insurance),” said Jacob Channel,  LendingTree senior economist. “That same loan would cost a borrower $1,756 at today’s new average rate of 5.78%. That’s an extra $103 a month, $1,236 a year, and $37,080 over the lifetime of a loan, he said.”

Airlines stocks hit

Airlines, which had been flying high on forecasts for strong summer travel plans, were grounded by fears consumers will have to cut back on discretionary spending amid blistering inflation and slower economic growth.

High oil prices also remain a headwind for airlines as inventory and refining capacity remain constrained. A barrel of WTI crude was last up about 1.4% at $116.92.

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The NYSE Arca Airline index touched the lowest level since summer 2020 on Thursday. American Airlines fell to the lowest level since November 2020 and Southwest traded near a two-year low. Delta and United Airlines lost more than 7% and 8%, respectively.

Avelo said on Thursday it’s cutting by 50% fares to all 25 of its destinations “to help provide some inflation relief for folks during these uncertain times.”

Follow the 10-year Treasury note

Even through this tumult, analysts are encouraging investors to hold on, saying markets will rebound. But it’s a matter of time, and no one knows when that time will be.

Brad McMillan, chief investment officer for Commonwealth Financial Network, has some ideas though of what to look for to try to figure out when that time is.

“The critical rate that helps determine stock valuations is the yield on the 10-year U.S. Treasury note,” he said. “While the Fed is raising rates (and that has hit the markets), once the market sees those rate hikes ending, the 10-year rate will start to drop, and that will likely mark the start of the stock market recovery.”

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The yield on the benchmark 10-year Treasury note traded more than 15 basis points lower to 3.24%, after hitting an 11-year high earlier in the week, while the 30-year Treasury bond slid 12 basis points to 3.29%. The 2-year Treasury rate dropped 17 basis points to 3.11%.

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.  

This article originally appeared on USA TODAY: S&P 500, Dow, Nasdaq fall as rash of rate hikes fuel recession fears