Wall Street suffered its worst performance of the year on Tuesday, with the major indices closing in the red as investors interpreted a comeback in US economic activity in February as indicating that interest rates will need to remain elevated for a longer period of time to control inflation.
It was the third consecutive session in which the S&P 500 and Nasdaq Composite closed lower, while the loss in the Dow Jones Industrial erased its gains for 2023.
The declines occurred after the S&P Global Purchasing Manufacturers’ Index, a measure of economic activity in the United States, returned to expansion in February for the first time in eight months. According to a study, the reading of 50.2, up from 46.8 in January, was supported by a healthy services sector.
The report contributed to a deluge of recent economic data that has portrayed a picture of a strong economy that continues to thrive despite numerous rate hikes by the central bank in 2022 intended to curb inflation.
With inflation remaining well below the Fed’s 2% target and the economy retaining some vigor, money market players have been revising upwards where they anticipate Fed fund rates to peak – currently at 5.35 percent in July and remaining close to that level throughout the year.
After their worst yearly performance in more than a decade in 2022, US stocks had a positive start to 2023 as investors anticipated the central bank’s rate-hike cycle was nearing its conclusion. However, such optimism puts equity markets prone to declines when data contradicts such predictions.
Wednesday’s release of the minutes from the Fed’s latest policy meeting will provide investors with additional insight into the central bank’s stance on interest rates.