“On the macro front, there remains lingering uncertainties about the outlook for the global economy. A slew of disappointing U.S. data releases and hawkish Fed rhetoric are also adding to the risk-off mood across markets,” said Anderson Alves, trader at ActivTrades.
The S&P 500 fell 1.6% to 3,928.86 after having been up as much as 0.6% in the early going. The Dow Jones Industrial Average lost 1.8% to 33,296.96 and the Nasdaq composite slid 1.2%, ending a seven-day winning streak, to 10,957.86. The losses are reversal for the market, which kicked off the year with a two-week rally.
The Russell 2000 index fell 1.6% to 1,854.36.
The selling came as new economic data showed that as inflation cools, the economy is slowing, heightening worries about the possibility of a recession. Meanwhile, a key Federal Reserve policymaker said interest rates need to go higher than the central bank signaled earlier.
The government reported Americans cut back on their spending at retailers more than anticipated last month, the second straight decline. Separately, the Federal Reserve said U.S. industrial production, which covers manufacturing, mining and utilities, fell in December much more than economists had expected.
The government also reported more encouraging inflation data. Wholesale prices rose 6.2% in December from a year earlier, a sixth straight slowdown for the measure of prices before they are passed along to consumers.
Investors have been hoping that easing inflation and a slowdown in economic growth might influence the Federal Reserve's position on interest rates. The central bank aggressively raised rates throughout 2022 in an effort to cool hot inflation, but that has hurt prices of stocks and bonds, and risks going too far and bringing on a recession.
While there's growing evidence that high inflation is finally easing, further rate hikes are still needed, according to Loretta Mester, president of the Federal Reserve Bank of Cleveland.
"I still see the larger risk coming from tightening too little," Mester said in an interview Tuesday with The Associated Press.
Mester stressed her belief that the Fed’s key rate should rise a “little bit” above the 5% to 5.25% range that policymakers have collectively projected for the end of this year. It has raised its key overnight rate to a range of 4.25% to 4.50% from roughly zero a year ago. The Fed will announce its next decision on interest rates Feb. 1. Investors are largely forecasting a raise of just 0.25 percentage points next month, down from December’s half-point hike and from four prior increases of 0.75 percentage points.
The broader economic picture is still not clear enough to see whether the Fed’s fight against inflation is working well enough to avoid a recession. Several major banks have forecast at least a mild recession at some point in 2023.
Technology stocks were among the biggest drags on the market, including a 1.9% drop in Microsoft after the tech titan joined others in its industry in announcing layoffs. The software giant is cutting 10,000 workers or almost 5% of its workforce.
Investors reviewed the latest batch of corporate earnings for more insight into how inflation and consumer spending are affecting profits and revenue. PNC Financial Services Group fell 6% after reporting weak earnings.
In energy trading Thursday, U.S. benchmark crude fell $1.25 to $78.23 a barrel in electronic trading on the New York Mercantile Exchange. It fell 70 cents to $79.48 per barrel on Wednesday.
Brent crude, the international pricing standard, lost $1.10 to $83.88 a barrel.
In currency trading, the U.S. dollar declined to 128.00 Japanese yen from 128.87 yen. The euro cost $1.0799, little changed from $1.0796.
AP Business Writers Damian J. Troise and Alex Veiga contributed to this report.
Yuri Kageyama is on Twitter https://twitter.com/yurikageyama