Stocks had their biggest daily decline in over a month on Friday, capping a week of turbulence on Wall Street as investors struggled to calibrate their expectations for inflation and interest rates.
The S&P 500 fell 1.3 percent, its biggest drop since May 12 and a decline that stood out because the index had made only small moves over the past month.
It was the fourth consecutive daily decline for the index, bringing the S&P 500’s losses for the week to 1.9 percent. That’s its worst showing since late February.
Wall Street’s focus this week was on the Federal Reserve and the potential for it to increase interest rates or take other steps to cut back its emergency support for the economy. The central bank said on Wednesday that it had no immediate plans to change its policy, but it did release projections that showed most officials expected interest rates to start to rise in 2023.
On Friday morning, James Bullard, the president of the Federal Reserve Bank of St. Louis, said on CNBC that it might be appropriate for the Fed to raise interest rates in late 2022. Mr. Bullard does not have a vote on monetary policy this year, but he will be a voting member of the Fed’s policy committee in 2022.
He is not in the Fed’s majority: The central bank’s so-called dot plot of rate projections suggested that 11 of the 18 central bank officials that were polled expected rates to remain at near-zero next year.
Even so, traders took notice of Mr. Bullard’s comments, and yields on government bonds, which are the basis for borrowing costs across the economy, briefly jumped on Friday. By the afternoon, however, they were sharply lower, with the yield on 10-year Treasury notes falling to 1.44 percent.
The Fed also made clear this week that officials were beginning to talk about a plan to slow its bond buying, the first baby step away from the emergency help it has been providing the economy. Mr. Bullard’s comments on Friday served to underscore that shift.
It may appear counterintuitive that long-term bond yields would fall with Fed officials floating the possibility that they would raise interest rates. But similar dynamics emerged in the years after the financial crisis.
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In 2010, as the Fed attempted to dial down the bond-buying programs it had put into place to help the economy recover from the financial crisis, bond yields tumbled sharply along with the stock market. It was only when Ben Bernanke, then the Fed’s chairman, signaled that a second round of bond-buying was on the way that markets reversed course and stocks and bond yields rallied.
On Friday, the chatter from analysts and traders focused on a sharp unwinding in recent days of the so-called reflation trade — premised on a steady continuation of support from the Fed — that had driven stocks and commodities higher in the opening months of 2021. Such investments, often known as cyclical assets, tend to rise in price as the business cycle gains momentum.
“Powell, with the help of St. Louis Fed President Bullard today, has just broken the spirits of the reflation crowd,” analysts with Strategas Research wrote in a note on Friday, referring to the Fed chair, Jerome H. Powell. “So the rally in cyclical assets (including inflation protected bonds) is going to have to take a little breather.”
Gold and copper, which were down this week, continued to slide after Mr. Bullard’s comments. Lumber prices, which had soared amid a pandemic-bred boom in home improvement and residential construction, continued to tumble. The dollar rose.
Analysts were unsure whether the recent decline in commodities and stock prices — which could be viewed as a sign investors are expecting a weaker pace of growth than they previously thought — was merely a knee-jerk reaction to shifting signals being sent from the Fed or if it was a fundamental downgrade of investors’ expectations for the economic recovery.
“We will have to carefully monitor those trends to see if it was a position-driven event and something that will eventually whipsaw, or a more protracted repricing to an altered cyclical outlook,” analysts with J.P. Morgan wrote in a note to clients on Friday.
Not all stocks suffered. Companies in industries that tend to benefit from low interest rates — such as homebuilders — rose. Lennar jumped 3.8 percent after it reported better-than-expected revenue and profits on Thursday. D.R. Horton climbed 1.3 percent.
And fast-growing technology firms — which tend to do well when interest rates drop — also fared well. Tesla gained 1.1 percent. DocuSign — a technology firm closely tied to the mortgage and real estate market — rose 5.3 percent. The cybersecurity firm CrowdStrike increased 1.5 percent.
Oil prices bucked the downtrend in commodities, climbing on expectations of growing demand as the global economic recovery broadens from the United States to Europe and emerging market countries. West Texas Intermediate, the U.S. benchmark crude, rose 0.8 percent.
Mohammed Hadi contributed to this report.