Wall Street experienced a black Thursday after the stock index, the Dow Jones Industrial Average, fell 3.1% in less than 24 hours, just one day after having its highest value since 2020.
The drop in the index came as a blow after Wall Street held its breath over an announcement by Federal Reserve (Fed) Chairman Jerome Powell. Powell indicated that the central bank’s board was not considering raising interest rates by 0.75% at an upcoming meeting, as investors had feared.
On Wednesday, the Fed raised the interest rate by 0.5%, which represents its highest increase since 2000, when the dot.com crisis (a massive bankruptcy of Internet companies with a lot of debt and little or no revenue) happened.
With inflation at its highest level since 1980, markets anticipate that the FED will be forced to make future interest rate increases to contain the U.S. price hikes that expanded massively to contain the COVID-19 crisis.
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When interest rates rise, the cost of credit in the economy becomes more expensive, so both companies and consumers will reduce their spending. This will cause profits to fall and stock prices to decline.
The fear of rising interest rates becomes even more critical in a market over-leveraged by government stimulus and the Fed’s expansionary monetary policy during the pandemic.
Technology companies: the main victims of black Thursday on Wall Street
On Wall Street, Tesla fell by 8.3%, Amazon by 7.6%, while shares of major banks fell by an average of 2.7%. The Russell 2000, the small companies in the U.S. fell 4%. Netflix fell 6.8%, while the once Facebook, now known as Meta fell 6.8%. Finally, Apple’s stock plummeted by 5.6% during the bearish rally in the market.
The uncertain market situation is leading some investors to take advantage of the widespread declines to exit some of the stocks in their portfolios that were highly valued by pandemic-era stimulus.
Other stock market indexes such as the Nasdaq, which lists the main technology companies in the United States, fell 5% and the S&P500, which lists the 500 largest companies in America, fell 3.6% during the day Thursday.
Despite the Fed’s reassuring announcement, investors are experiencing the most aggressive tightening in U.S. monetary policy in 20 years.
The market is now wondering how high the Fed can raise interest rates over the next two years while inflation is spiraling out of the central bank’s control. Investors are also concerned that contractionary policy could affect not only corporate earnings, but also the growth of the U.S. economy.