By Christine Idzelis and William Watts
U.S. stocks ended mixed Friday, with the technology-laden Nasdaq Composite and S&P 500 closing lower, as investors continued to digest the Federal Reserve’s plans to aggressively raise interest rates and shrink its balance sheet. Key inflation data and corporate earnings reports loom next week.
How did stock indexes perform?
The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.76% rose 137.55 points, or 0.4%, to close at 34,721.12.
The S&P 500 /zigman2/quotes/210599714/realtime SPX -1.01% slipped 11.93 points, or 0.3%, to finish at 4,488.28.
The Nasdaq Composite /zigman2/quotes/210598365/realtime COMP -1.58% shed 186.30 points, or 1.3%, to end at 13,711.
For the week, the Dow declined 0.3%, the S&P 500 fell 1.3% and the Nasdaq dropped 3.9%. The S&P 500 and Nasdaq each snapped a three-week winning streak while the Dow fell for a second week in a row, according to Dow Jones Market Data.
What drove the markets?
Major U.S. stock benchmarks mostly fell, with the S&P 500 index ending lower after struggling for direction earlier in the session, as investors continued to digest expectations for the Federal Reserve to become more aggressive combating high inflation.
Six to 9 months ago the Federal Reserve didn’t seem too worried about inflation becoming a problem, said Bob Doll, chief investment officer at Crossmark Global Investments, in a phone interview Friday. “Now they’re tripping all over themselves to see who can be more hawkish,” he said of Fed officials.
Earlier this week, Fed Gov. Lael Brainard gave a hawkish speech indicating the central bank’s monetary tightening may include interest rates hikes plus a rapid pace of balance sheet reductions that could begin as soon as May. Wednesday’s release of the minutes of the last Federal Open Market Committee meeting set the stage for a likely $95 billion per month reduction in the central bank’s balance sheet while reaffirming prospects of multiple, half-point increases in interest rates in future policy meetings.
“Just because the Fed starts raising rates doesn’t mean that immediately the economy is going into the tank,” said Doll. He said he expects economic growth will be “OK” this year, even as it slows from 2021, and that inflation, which is running at a 40-year high, may peak around mid-2022.
With hot inflation, rising rates and the Russian-Ukraine war weighing on investor sentiment, “the market has hung in there well despite all that,” said Doll.
Technology and other growth stocks, which are most sensitive to interest rates, were under renewed pressure Friday as Treasury yields continued to rise, dragging down the Nasdaq.
“The Nasdaq has longer duration equities than the S&P 500,” meaning companies in the tech-heavy Nasdaq Composite tend to have potential earnings further out in the future as opposed to producing profits now, Doll said. That makes them more vulnerable to rising interest rates, he said, pointing to the yield on the 10-year Treasury note jumping more than 30 basis points this week.
The yield on the 10-year Tresasury note BX:TMUBMUSD10Y rose 5.9 basis points Friday to 2.713%, the highest since March 5, 2019 based on 3 p.m. Eastern Time levels, according to Dow Jones Market Data. The 10-year yield climbed 33.9 basis points this week and has risen in four of the past five weeks.
“With rates going up, the Nasdaq is going to be a bit difficult,” William Huston, chief investment officer at Bay Street Capital Holdings in Palo Alto, Calif., said in a phone interview Friday. Huston said that he made some portfolio changes early this year in anticipation of rising interest rates, reducing exposure to companies tracked by the Nasdaq-100 index while adding the SPDR S&P Bank ETF /zigman2/quotes/201006419/composite KBE -1.62% and the ProShares S&P 500 Dividend Aristocrats ETF /zigman2/quotes/208747379/composite NOBL -0.86% .
Shares of Invesco QQQ Trust /zigman2/quotes/208575548/composite QQQ -1.51% , which tracks the Nasdaq-100 index, fell 1.4% Friday, increasing losses for the year to around 12%, according to FactSet data. Also, information technology was the worst performing of the S&P 500’s 11 sectors this week, dropping about 4%, FactSet data show.