Stocks sink as omicron, rate worries rattle Wall Street

FILE – In this March 23, 2021 file photo, pedestrians walk past the New York Stock Exchange in New York’s Financial District. (AP Photo/Mary Altaffer, File)

By Damian J. Troise and Stan Choe, The Associated Press

NEW YORK (AP) — Already unnerved by the newest coronavirus variant, Wall Street’s losses deepened on Tuesday after the head of the Federal Reserve said it will consider shutting off its support for financial markets sooner than expected.

The S&P 500 was 1.8% lower in afternoon trading after Fed Chair Jerome Powell told Congress the central bank may halt the billions of dollars of bond purchases it’s making every month “perhaps a few months sooner.” It had been on pace to wrap up the purchases, meant to goose the economy by lowering rates for mortgages and other long-term loans, in June.

An end to the purchases would open the door for the Fed to raise short-term interest rates from their record low of nearly zero, diluting one of the main propellants that’s sent stocks to record heights. Short-term Treasury yields almost immediately flipped from losses to gains following Powell’s remarks, as investors moved up their expectations for the Fed’s first rate hike.

Losses for stocks accelerated, with the drop for the Dow Jones Industrial Average more than tripling in half an hour. It was down 656 points, or 1.9%, at 34,479, as of 1 p.m. Eastern.

The Nasdaq composite was down 1.8% after earlier holding up better than the rest of the market. Higher interest rates tend to hurt stocks that are seen as expensive relative to their profits and that are banking on big profit growth far in the future. Such companies play a bigger role in the Nasdaq than other indexes.

Omicron variant worries investors

The whammy on interest rates came after stocks were already weak in the morning due to concerns about how badly the fast-spreading omicron variant of the coronavirus may hit the global economy.

The CEO of Moderna predicted existing COVID-19 vaccines will be less effective with omicron than earlier variants, he said in an interview with the Financial Times. Regeneron also said Tuesday that its monoclonal antibody treatment may have reduced effectiveness on omicron.

Much is left to be determined about the variant, including how much damage it will do the global economy by slowing down already gummed-up supply chains or scaring people away from stores. The uncertainty has sent Wall Street through jagged up-and-down jolts as governments tightened restrictions in hopes of slowing its spread.

The S&P 500 sank 2.3% Friday for its worst loss for February, only to rise 1.3% Monday as investors reconsidered whether the reaction was overdone. Tuesday’s loss for the market has the S&P 500 on pace for one of its 10 worst days of the year.

One measure of nervousness in the stock market jumped 20%, nearing its level from Friday, when it touched its highest point since March. Much of the rise occurred after Powell began speaking.

Gold usually does well when fear among investors is rising, but its price flipped from a gain to a loss of 0.5%. Higher interest rates could reduce the appeal of gold, which doesn’t pay its holders any interest.

Crude oil prices slid with concerns that a global economy weakened by omicron would burn less fuel. Benchmark U.S. crude dropped 7.2% to $64.90 per barrel and touched its lowest level in three months. Brent crude, the international standard, fell 6%.

Federal Reserve Chairman Jerome Powell speaks during an event in the South Court Auditorium on the White House complex in Washington, on Nov. 22, 2021. (AP Photo/Susan Walsh, File)

If omicron does ultimately do heavy damage to the global economy, it could put the Federal Reserve in a difficult spot. Usually, the central bank will lower interest rates, which encourages borrowers to spend more and investors to pay higher prices for stocks.

But low rates can also encourage inflation, which is already high across the global economy. Powell acknowledged in his testimony before Congress that inflation has been worse and lasted longer than the Fed expected. For months, officials described inflation as only “transitory,” but Powell said that word no longer works.

The subsequent losses for stocks Tuesday were widespread, with more than 95% of the big stocks in the S&P 500 lower.

Smaller stocks fell even more, with the Russell 2000 index down 2.6%. Investors typically see them getting hurt more than their larger rivals by both higher interest rates and by a weaker U.S. economy.

One signal in the bond market was also flashing some concern about the economy’s prospects. Longer-term Treasury notes usually offer higher yields than shorter-term notes, in part to make up for the increased risk that future inflation will eat into their returns.

A 10-year Treasury is still offering more in yield than a two-year Treasury, but the gap narrowed sharply on Tuesday. The two-year yield rose to 0.52% from 0.51% late Monday. The 10-year yield, though, fell to 1.44% from 1.52%. Many investors see that narrowed gap as meaning the bond market has less confidence in the economy’s long-term strength. If it were to flip, with short-term yields rising above long-term yields, many investors see that as a semi-reliable predictor of a recession.