Stocks fell on Friday, with the Dow Jones Industrial Average on pace for its worst weekly loss since January, as traders worry the Federal Reserve could start raising rates sooner than expected. Economic comeback plays led the market sell-off.
The blue-chip average dropped 413 points, bringing its week-to-date losses to 3.1%. The S&P 500 fell 0.9%, pushing its loss this week to more than 1.5%. The tech-heavy Nasdaq Composite dipped 0.8%.
St. Louis Federal Reserve President Jim Bullard told CNBC's "Squawk Box" it was natural for the Fed to tilt a little "hawkish" this week and that the first rate increase from the central bank would likely come in 2022. His comments came after the Fed on Wednesday added two rate hikes to its 2023 forecast and increased its inflation projection for the year, putting pressure on stock prices.
"This week's first whiff of an eventual change in Fed policy was a reminder that emergency monetary conditions and the free-money era will ultimately end," strategists at MRB Partners wrote in a note.
Pockets of the market most sensitive to the economic rebound led the sell-off this week. The S&P 500 energy sector and industrials are down 4.5% and 3.3%, respectively, week to date. Financials and materials meanwhile, are down more than 5% each. These groups had been market leaders this year on the back of the economic reopening.
The decline in stocks came as the Fed's actions caused a drastic flattening of the so-called Treasury yield curve. This means the yields of shorter-duration Treasurys — like the 2-year note — while longer-duration yields like the benchmark 10-year declined. The retreat in long-dated bond yields reflects less optimism toward economic growth, while the jump in short-end yields shows the expectations of the Fed raising rates.
This phenomenon is hurting bank stocks particularly as bank earnings could take a hit when the spread between short-term and long-term rates narrows. Bank of America and JPMorgan Chase shares on Friday lost more than 2% each. Citigroup fell by 1.7% and was headed for its 12th straight daily decline.
Fed Chairman Jerome Powell said Wednesday that officials have discussed tapering bond buying and would at some point begin slowing the asset purchases.
"Investors may be interpreting the Fed's hawkish tilt Wednesday as a sign that an extended US post-pandemic economic expansion may be a bit harder to achieve in a potentially emerging environment of less accommodative monetary policy," Goldman Sachs' Chris Hussey wrote in a note.
Commodity prices have been under pressure this week as China attempts to cool rising prices and the U.S. dollar strengthens. Copper, gold and platinum fell once again on Friday.
Friday also coincides with the quarterly "quadruple witching" in which options and futures on indexes and equities expire. Many expect trading to be more volatile in light of this event.