Stocks fell on Friday, ending one of the worst weeks of the year for Wall Street. But a parade of prominent investors and corporate executives made it clear that they believed the worst was yet to come for the economy and financial markets.
After hitting a low in June, the S&P 500 had rallied more than 17 percent into mid-August, before losing steam again. The sell-off this week leaves the index just 5.6 percent above the bottom reached in June, after a fall of 0.7 percent on Friday that brought its weekly losses close to 5 percent. The market has only dropped 5 percent in a week three times this year.
Yet even after the swift decline this week, some of the most powerful trading houses in the world, deploying trillions of dollars on behalf of pension funds, governments and other investors, are warning that there is more pain ahead.
Business leaders, policymakers and ordinary Americans are all grappling with the end of a decade of rock-bottom interest rates that helped propel the economy after the 2008 financial crisis, and a shift to a much-less familiar, once-in-a-generation burst of inflation. Crimped supply chains, the war in Ukraine and an emerging energy crisis are among a host of challenges that add to a level of uncertainty that some investors say they have not seen in decades.
The underlying strength of the American economy offers some cushion, but it is also making it difficult for the Federal Reserve to cool things down quickly, with a strong labor market and rising wages helping push prices for goods and services even higher. The fear is that the medicine required to cure the problem could push the United States into a serious economic downturn.
The drop on Friday came as the stock of logistics giant FedEx cratered more than 21 percent, after it warned that its profit was being hit by weakness in Asia and Europe. FedEx said that it would cut some services, close locations and freeze hiring, becoming the latest in a string of companies that have gone public with their concerns and rattled investor confidence.
FedEx is seen as an economic bellwether because its package shipping business reflects both business and consumer demand. The company’s chief executive, Raj Subramaniam, speaking to CNBC on Thursday, predicted a “worldwide recession.”
General Electric’s chief financial officer, Carolina Dybeck Happe, also warned of challenges at a conference on Thursday, bemoaning lingering supply chain issues that remain “tough” and “impair our ability to deliver to our customers.” The company’s shares fell nearly 4 percent on Friday.
The fall at the end of the week followed the S&P 500’s worst single-day decline since June 2020, a 4.3 percent slide on Tuesday, which came after the widely watched Consumer Price Index shattered hopes that inflation had begun to ease. The report reignited concerns that the Federal Reserve could push the United States into a recession as it raises rates in an effort to combat rising prices.
Economic worries were also evident in other corners of the financial markets: Corporate debt prices fell and oil prices notched a third straight week of losses.
Mr. Tangen, of Norway’s sovereign wealth fund, said that he did not think there was an investment area anywhere in the world likely to make money in the near future. “That’s the really depressing thing,” he said.
The grim mood stands in stark contrast to the roaring recovery from the depths of the pandemic, and a stock market rally that pushed the S&P 500 to new highs in early January. Investors and policymakers underestimated the potential for inflation to become an intractable problem, worsened by rising energy prices after Russia’s invasion of Ukraine.
“What we are faced with is inflation expectations that are pretty embedded,” said Seth Bernstein, the president and chief executive of AllianceBernstein, a fund manager with more than $600 billion in assets. A recession is the only way to “break” them, he said.
Investors this week adjusted their forecasts for how much the Fed will need to raise interest rates and how long the central bank will keep them high, foretelling more pain for companies, lower stock prices and higher unemployment.
The Fed has already raised interest rates to a range of 2.25 percent to 2.5 percent from near zero in March. The central bank is likely to increase borrowing costs again when it meets next week, and is also scheduled to release its projections for growth, inflation and the path ahead for interest rates.
Market-based forecasts for interest rates show traders expect an increase of three-quarters of a percentage point next week. Anything higher would be a hefty move not made since 1984 and could lead financial markets to drop further.
Overall, market prices point to a peak in rates of 4.25 percent to 4.5 percent next year, a full 2 percentage points higher than their current level.
The Fed is not alone in its campaign to elevate interest rates to combat inflation. On Thursday, the World Bank added to recession warnings, saying that the combined effect of central banks all over the world raising interest rates simultaneously could push the global economy into a downturn as soon as next year.
Among the largest U.S. banks, predictions diverge. Economists at Wells Fargo and Citigroup expect recession. David Solomon, chief executive of Goldman Sachs, said on Friday that financial markets “are in a period of lower, longer and bumpier.”
JPMorgan Chase and Morgan Stanley continue to predict a soft landing, in which the Fed is able to to bring down inflation without going too far and causing a recession.
Dan Ivascyn, chief investment officer of the bond investment house Pimco, which manages roughly $1.8 trillion, said he was “a bit more concerned” about just how broad inflation pressures across the U.S. economy are following the release of inflation data on Tuesday.
“Investors can expect a lot more volatility in markets going into year end,” he said. “We think 2023 is still going to be filled with lots of uncertainty.”