Stocks lose 2% on Thursday as investors fear the Fed is tipping the economy into a recession

Stocks fell sharply on Thursday after new data showed retail sales fell more than expected in November, raising fears that the Federal Reserve’s relentless rate hikes are tipping the economy into recession.

The Dow Jones Industrial Average fell 760 points, or 2.2%, on its way to its worst day since September as hopes for a year-end rally faded. The S&P 500 fell 2.4%, bringing its decline for December to nearly 5%. The Nasdaq Composite fell 3% as the battered tech-heavy index extended its 2022 losses to more than 31%.

The selling was broad-based with only 14 stocks in the S&P 500 trading in positive territory. Mega-cap tech stocks fell, with shares on apple and Alphabet down more than 4%, and shares of Microsoft and Amazon lower by more than 3%. Shares of Netflix fell more than 9% after a Digiday report said the streaming company is offering to return money to advertisers after missing viewership targets.

The disappointing retail sales report suggested that inflation is taking a toll on consumers. Retail sales fell 0.6% in November, according to the Commerce Department. That was a bigger loss than the Dow Jones estimate of a 0.3% decline.

The sell-off started on Wednesday in the wake of the Fed’s latest increase in overnight lending rates. The central bank also said it will continue to raise interest rates through 2023, and estimates fed funds rates will peak at 5.1 percent higher than expected. With Wednesday’s rise of half a percentage point, the target range for interest rates is currently 4.25% to 4.5%, the highest in 15 years.

“The stock market reaction is now factoring in a recession, dismissing the possibility of the ‘soft/soft’ landing recently mentioned by Powell on [Brookings Institution]”, Quincy Krosby, global chief strategist at LPL Financial, wrote on Thursday.

“The tug-of-war between the Fed and the markets is entirely on the market’s side: The downturn is not ‘transient’ and the Fed will be forced to act before 2024,” Krosby added.

The Dow closed below 34,000 on Wednesday, then rallied on Thursday after weak retail sales data. Treasury yields continued to defy the Fed, falling on fears that the central bank is going too far. The 10-year interest rate fell below 3.5%.

Bank stocks also fell as fears of a recession grew. JPMorgan Chase and Bank of America each lost more than 2%.