Why did the stock market fall? Dow finishes nearly 1,000 points lower in worst day since October 2020

On Thursday, stocks gave up strong gains, reversing sharply lower. With Friday’s plunge, the Dow suffered a 1.9% weekly decline, its fourth straight loss. The S&P 500 dropped 2.8% and the Nasdaq tumbled 3.8% for their third consecutive weekly drops.

What drove the market?

Stock-market weakness picked up Friday where Thursday’s selloff left off, when equities tumbled into the afternoon after Powell added his support for moving faster on raising interest rates to cool inflation, measures that would include a possible 50 basis point interest rate hike in May.

“It would seem investors have been too complacent about the upcoming [Fed] meeting, which will need to change,” said Michael Kramer, founder of Mott Capital, in a note.

The Cboe Volatility Index
VIX,
+24.38%,
an options-based measure of expected volatility over the next 30 days, had been too low heading into the May 3-4 Federal Open Market Committee, or FOMC, meeting, Kramer said. It rose Thursday and was up another 19.5% at 27.1- on Friday, moving above its long-term average just below 20.

Powell’s remarks appeared to make a half percentage point rate hike the base case, with the central bank also likely to announce the beginning of the unwinding of its balance sheet, Kramer said.

Meanwhile, traders of fed funds futures have priced in a 94% chance that the Federal Reserve will deliver a 75 basis point rate hike in June, up from 70% on Thursday and 28% a week ago, according to the CME FedWatch Tool. 

Stocks trimmed losses somewhat in afternoon activity after Cleveland Fed President Loretta Mester, in a television interview, said she remained in favor of 50 basis point rate increases, but saw no need for the “shock” of a 75 basis point increase. The bounce proved short-lived, however, with stocks falling to new session lows ahead of the closing bell.

The benchmark 10-year Treasury yield 
TMUBMUSD10Y,
2.895%,
meanwhile, pulled back slightly to around 2.89% after climbing about 8.1 basis points to 2.917% on Thursday, the highest since Dec. 4, 2018.

Read: How to invest as inflation, higher interest rates and war roil markets

The Fed’s hawkish shift and the relentless rise in Treasury yields may be sapping the previous appeal of equities, which had previously been seen as the only viable avenue for many return-seeking investors.

“Investors appear to be moving away from the TINA (There is no Alternative) narrative as of late when it comes to equities,” said Brian Price, head of investment management at Commonwealth Financial Network, in a note. “This is the second straight week of significant outflows from equity mutual funds and days like today are unlikely to change the sentiment moving forward. The one positive takeaway may be that sentiment has become too bearish and we could see a countertrend rally at some point in the coming weeks.”

In One Chart: Investors just pulled a massive $17.5 billion out of global equities. They’re just getting started, says Bank of America.

All 11 major S&P 500 sectors fell Friday, with healthcare dropping 3.6% after a downbeat profit forecast from HCA Healthcare Inc.
HCA,
-21.82%
sent its shares tumbling 21.8%. Other hospital operators, including Tenet Healthcare Corp.
THC,
-15.65%,
Community Health Systems Inc.
CYH,
-17.93%
and Universal Health Services
UHS,
-13.96%
also fell between 14% to 17.9%.

However, of the 99 companies in the S&P 500 that have reported earnings for the first quarter, 77.8% of them have beat market expectations. Typically, 66% of companies beat estimates, according to Refinitiv data.

Next week will mark another big week for earnings, with 558 companies reporting, Saxo noted. “It is the big test of companies’ ability to pass on costs to their customers,” they said.

Investors may also be skittish ahead of the final round of France’s presidential election on Sunday. An upset victory by far-right candidate Marine Le Pen over incumbent Francois Macron would likely spark market volatility, analysts said.

See: Here’s how markets are positioned for Sunday’s presidential election in France between Macron and Le Pen

What companies were in focus?

• Gap Inc.
  GPS,
  -17.98%
  stock tumbled 18%, following a bigger-than-expected drop in sales and as the retailer announced the departure of Old Navy CEO Nancy Green.

• Shares of Qualtrics International Inc.
  XM,
  -10.52%
  fell 10.5% after the experience-management software company reported fiscal first-quarter forecast-beating revenue.

• Snap Inc.
  SNAP,
  +1.16%
  shares rose 1.2% after the social media group reported quarterly revenue that fell short of Wall Street’s expectations.

• Shares of American Express Co.
  AXP,
  -2.80%
  fell 2.8% after topping earnings expectations Friday amid a continued rebound in travel and strong spending trends among younger consumers.

• Verizon Communications Inc.
  VZ,
  -5.64%
  fell 5.6% after its earnings report showed a net loss of postpaid phone subscribers in its latest quarter, calling out “competitive dynamics within the industry,” though it said it had its best quarter of broadband net additions in more than a decade.

How did other assets trade?

• The ICE U.S. Dollar Index 
  DXY,
  +0.54%
   rose 0.5% to trade at its highest since March 2020.

• Bitcoin 
  BTCUSD,
  +0.14%
  fell 4.5% to trade near $39,400.

• The U.S. oil benchmark
  CL.1,
  -1.97%
   fell $1.72, or 1.7%, to settle at $102.07 a barrel on the New York Mercantile Exchange, falling 4.1% for the week.

• Gold
  GC00,
  -0.81%
  fell $13.90, or 0.7%, to settle at $1,934.30 an ounce, leaving a 2.1% weekly fall.

• The Stoxx Europe 600
  SXXP,
  -1.79%
  dropped 1.8% while London’s FTSE 100 
  UKX,
  -1.39%
  fell 1.4%.

• The Shanghai Composite 
  SHCOMP,
  +0.23%
   rose 0.2%, while the Hang Seng Index 
  HSI,
  -0.21%
  slipped 0.2% in Hong Kong and Japan’s Nikkei 225 
  NIK,
  -1.63%
  fell 1.6%.