Dow slides more than 300 points on fears the Fed will keep tightening into a recession

Stocks fell Monday on fears that the Federal Reserve may continue tightening until it steers the economy into a recession.

The Dow Jones Industrial Average fell by 290 points, or 0.85%, while the S&P 500 and Nasdaq Composite slid by 1.1% each.

A hotter-than-expected reading of November ISM Services further fueled concerns that the Fed will continue hiking. The index posted a 56.5% reading, topping the Dow Jones estimate of 53.7% and increasing from October.

In other news, Tesla shares slumped on reports of an output cut at its Shanghai factory, while Macao-linked casino stocks gained on hopes of easing Covid-19 restrictions.

Investors are looking ahead to next week’s Federal Reserve interest rate decision at the conclusion of the central bank’s December policy meeting.

Following a speech last week by Fed Chairman Jerome Powell, markets largely expect the central bank will approve a 0.5 percentage point interest rate increase. That would mark a step down from a series of four straight 0.75 percentage point hikes.

However, Powell also said the “terminal rate,” or point where the Fed stops raising, likely “will need to be somewhat higher” than indicated at the September meeting. That could mean a fed funds rate that ends up in excess of 5%, from its current target range of 3.75%-4%.

Friday’s nonfarm payrolls report added to the market’s Fed anxiety. Average hourly earnings rose 0.6% for November, twice the Dow Jones estimate, and the 12-month increase was 5.1%, half a percentage point above expectations. Wage pressures on inflation could force the Fed into an even more aggressive stance.

Wall Street is coming off its second positive week in a row, with the S&P 500 and Nasdaq advancing 1.1% and 2.1%, respectively. The Dow advanced 0.2% last week.

Despite the recent rally, Morgan Stanley chief U.S. equity strategist Mike Wilson said the risk-reward for equities has likely reached its cap as it nears the bank’s original tactical target range of 4,000 to 4,150.

“As suggested two weeks ago, for this tactical rally to go higher, back end rates would need to fall,” he said in a note to clients Monday. “Fast forward to today and that’s what has happened. However, we are now right into our original upside targets and we recommend taking profits before the Bear returns in earnest.”