Major U.S. stock indexes fell Wednesday as investors worried that the Federal Reserve might respond more aggressively to rising inflation than previously anticipated.
Markets had largely continued 2021’s momentum into the new year. The prospect of higher interest rates and an accelerated shrinking of the Fed’s bond portfolio, however, has clouded investors’ outlooks.
The minutes of the Federal Reserve’s December policy meeting, released Wednesday afternoon, indicated that officials might lift short-term interest rates as soon as March. U.S. equities fell broadly after the minutes were released. Bond yields rose to their highest levels since early April.
“Many of our clients are looking at the gains they’ve had and starting to wonder, ‘Hey, should I take a little bit of the cream off the top and put the money aside?,’” said Emerson Ham III, a senior partner with Sound View Wealth Advisors.
The S&P 500 dropped 92.96 points, or 1.9%, to 4700.58, a day after the index pulled back from a record high. The blue-chip Dow Jones Industrial Average—which set its own record Tuesday—lost 392.54 points, or 1.1%, to 36407.11.
The tech-heavy Nasdaq Composite Index fell 522.54 points, or 3.3%, to 15100.17, its largest one-day percentage decline since February 2021. The Nasdaq is off to its worst three-day start to a new year since 2008.
The yield on the 2-year Treasury note, which often rises when investors anticipate tighter central-bank policies, reached its highest level since Feb. 2020. The 10-year-Treasury yield rose to 1.7%, its highest level since April 2021. Bond yields rise as prices fall.
“If the Fed is looking to move that much faster, then that headwind is a little bit stronger than what the market was originally thinking about at the end of 2021,” said Principal Global Investors Chief Strategist Seema Shah.
Investors are bracing themselves for volatility in 2022. Easing supply chain snarls, potential interest rate increases and slowing growth in corporate earnings are all being closely watched. Contributing to the murky picture: a mixed economic recovery, complicated by the fast-moving Omicron variant of Covid-19, which is making it harder for investors to consider whether to readjust portfolios toward value stocks.
“People expected rate hikes this year, and that was talked about, but I don’t think people were expecting the Fed to already be speaking about letting the balance sheet run off, even as soon as the first rate hike,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
ADP’s December employment report, which measures the change in employees on private companies’ payrolls, said that 807,000 jobs were added last month, significantly above the 375,000 expected by economists.
“We expect growth to deflate as we go through the year. That will happen naturally. As the monetary, fiscal support fades, markets will have to stand on their own two feet,” said Hani Redha, a portfolio manager at PineBridge Investments. “It’s not a disaster, but it is a headwind at the same time that central banks are on the move.”
All 11 sectors of the S&P 500 ended in the red. Consumer staples, utilities, materials and energy posted smaller losses, finishing down less than 0.1%. The S&P 500’s Value Index has outperformed its Growth Index by 4.3 percentage points over the last two trading days, according to Dow Jones Market Data.
Markets had been lifted by easing concerns about the Omicron variant.
Photo: Spencer Platt/Getty Images
In individual stocks, Beyond Meat shares pared earlier gains and fell $3.13, or 5.1%, to $58.49. The company said its plant-based alternative to fried chicken would be sold at KFC restaurants starting next week. General Motors turned lower after earlier being on a pace to close at all-time highs, falling $3, or 4.6%, to $62.74.
Semiconductor companies saw their stocks fall. Nvidia fell for the third consecutive day, declining $16.86, or 5.8%, to $276.04. AMD also pulled back for a third straight trading day, falling $8.27, or 5.7%, to $136.15. Micron lost $1.94, or 2%, to $94.40.
Salesforce shares tumbled around $20.56, or 8.3%, to $227.67, continuing a stretch of losses that have pulled the software giant’s stock to its lowest levels in months. Alphabet fell $132.49, or 4.6%, to $2,755.50, its largest percentage decrease in almost a year.
Meme stocks also lost ground. GameStop fell $19.54, or 13%, to $129.37 while AMC Entertainment and Bed Bath & Beyond each lost about 11%.
Some energy stocks rallied, with Exxon and Chevron rising around 1.2% and 0.7% respectively. Brent crude, the international oil benchmark, advanced 80 cents per barrel, or 1%, to $80.80.
Overseas, the pan-continental Stoxx Europe 600 index rose less than 0.1% to a record close. Asian stock markets were mostly lower, with the Shanghai Composite Index down 1%. In Japan, the Nikkei 225 edged up 0.1%.
—Will Horner contributed to this article.
Write to Hardika Singh at hardika.singh@wsj.com
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