May 20, 2024

Technology stocks plummeted Friday, capping a dismal month on Wall Street as persistently rising inflation and gas prices, along with aggressive Fed hikes, stoke fears of recession. 

The benchmark S&P 500 fell 3.6% and finished April with an 8.8% loss, its worst monthly slide since March 2020. The Dow slumped 2.8%. The Nasdaq composite, heavily weighted with technology stocks, bore the brunt of the damage this month, ending April with a 13.3% loss, its biggest monthly decline since the 2008 financial crisis.

A sharp drop in Amazon was also weighing on indexes after the internet retail giant posted its first loss since 2015.

“Today’s market action is another instance where Big Tech bellwethers are dragging down the rest of the market,” Charlie Ripley, senior investment strategist for Allianz Investment Management, said in an email. “Rising cost pressures and uncertain outlooks from the largest technology names have investors agitated going into the weekend and investors are not likely to be comfortable any time soon with the Fed widely expected to deliver a 50 basis point hike along with a hawkish message next week.”

Federal Reserve Chair Jerome Powell has indicated the central bank may hike short-term interest rates at double the usual pace at upcoming meetings, starting in less than two weeks. The Fed has already raised its key overnight rate once, the first such increase since 2018.

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Big Tech disappoints

High-tech companies have been leading the market lower all month as traders shun the high-flying sector. Tech had posted gigantic gains during the pandemic and now is starting to look overpriced, particularly with interest rates set to rise sharply as the Fed steps up its fight against inflation. Investors spent much of April shifting money away from Big Tech companies, whose stock values benefit from low interest rates, to areas considered less risky. 

Internet retail giant Amazon slumped 14.2%, the biggest decline in the S&P 500, after reporting its first quarterly financial loss since 2015 and giving investors a disappointing revenue forecast. The weak update from Amazon comes as Wall Street worries about a potential slowdown in consumer spending along with rising inflation.

“This has become a classic trader’s market as spikes in volatility and increasingly bearish headlines reverberate,” Quincy Krosby, chief equity strategist for LPL Financial, said in a note Friday. “Moreover, disappointing guidance from technology giants, Amazon and Apple, have exacerbated concern that a decidedly more hawkish Fed, coupled with still intractable supply-chain issues, and rising energy prices may make the hope of a “soft landing” from the Fed more elusive.”

Major indexes have been shifting between slumps and rallies throughout the week as the latest round of corporate earnings hit the market in force. Investors have been reviewing a particularly heavy batch of financial results from big tech companies, industrial firms and retailers. 

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Fed hitting the brakes

Much of the anxiety on Wall Street in April has centered around how quickly the Fed will raise its benchmark interest rate and whether an aggressive series of hikes will crimp economic growth. 

Relentlessly rising inflation has prompted central banks to raise interest rates in order to temper the impact on businesses and consumers. The chair of the Fed has indicated the central bank may raise short-term interest rates by double the usual amount at upcoming meetings, starting next week. It has already raised its key overnight rate once, the first such increase since 2018, and Wall Street is expecting several big increases over the coming months.

The tough medicine the Federal Reserve is using in its fight against inflation — high interest rates — will increase borrowing costs across the board for people buying cars, using credit cards and taking out mortgages to buy homes. 

Prices for everything from food to gas have been rising as the economy recovers from the pandemic and there has been a big disconnect between higher demand and lagging supplies. Russia’s invasion of Ukraine has only added to inflation worries as it drives price increases for oil, natural gas, wheat and corn.

The S&P 500’s consumer staples sector, which includes many household and personal goods makers, is on track to be the only sector in the benchmark index to make gains in April. Other safe-play sectors, such as utilities, held up better than the broader market, while technology and communications stocks are among the biggest losers.

The Commerce Department on Friday reported that an inflation gauge closely tracked by the Federal Reserve surged 6.6% in March compared with a year ago, the highest 12-month jump in four decades and further evidence that spiking prices are pressuring household budgets and the health of the economy.

Bond yields rose following the hot readings on inflation. The yield on the 10-year Treasury rose to 2.89% from 2.85%.

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