Wall Street tumbles, Dow loses 697 on fears about high rates

FILE - Traders work on the floor at the New York Stock Exchange in New York, Tuesday, Jan. 24, 2023. NEW YORK — — Stocks tumbled to their worst day in two months Tuesday, buckling under worries about higher interest rates and their tightening squeeze on Wall Street and the economy.

The other main lever is also looking precarious as interest rates continue to rise. When safe bonds are paying higher amounts of interest, they make stocks and other investments look less attractive. Why take a lot of risk on stocks if safer things are paying out more? Higher rates also raise the risk of a recession because they slow the economy in hopes of snuffing out inflation.

“That is what's weighing on the market,” said Keith Lerner, chief market strategist at Truist Advisory Services. The latest evidence came from a preliminary report Tuesday that suggested business activity is gaining momentum. The services industry likely returned to growth last month and was at an eight-month high, according to S&P Global. Manufacturing, meanwhile, may still be contracting, but the reading hit a four-month high.

The worry is that the Fed could ratchet up its forecasts for rates further next month when it releases its latest projections for the economy. Besides showing more strength in the job market and retail sales than expected, recent reports have also suggested inflation is not cooling as quickly and as smoothly as hoped. Investors are also pushing back their forecasts for when the first cut to rates could happen.

“This is the first time in over a decade the Fed has had to worry about inflation,” he said. “What happened last year has created scar tissue that could keep rates higher for longer.”

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