(Bloomberg) --U.S. stocks fell in the worst selloff since Brexit, with the Dow falling almost 400 points after a Federal Reserve official signaled more willingness to raise interest rates.

Equities were jolted out of an eight-week stretch of calm as central bankers weigh the benefits of further stimulus efforts. Boston Fed President Eric Rosengren warned today that waiting too long to raise rates threatened to overheat the U.S. economy and could risk financial stability. Shares slipped from near-record levels Thursday after European Central Bank President Mario Draghi downplayed the need for more stimulus measures.

The S&P 500 fell 2.4% to 2,127.28 at 4 p.m. in New York, with losses accelerating in the closing minutes to finish with its biggest weekly drop since February. The gauge sank below its average price during the past 50 days for the first time since July 6.

“Dovish Fed members getting called up to bat for a hike is putting people on edge,” Yousef Abbasi, a global market strategist at JonesTrading Institutional Services, said. “It’s certainly one of those days where people are positioning for that September hike being back on the table. It’s happening as economic data lately is coming in more softly than people would like.”

(Image: Bloomberg News)
(Image: Bloomberg News)

Shares of phone companies, which flourished this year along with utilities as yield-starved investors flocked to their high dividends, marked their steepest loss since February 2014. Utilities dropped the most in seven months. Two other 2016 leaders -- energy and raw-material producers -- slumped more than 2.8%, while consumer-staples had the worst day in a year. Banks and insurers were less hard-hit, buffered by speculation higher rates will lift profits.

Read more: Yellen says rate-hike case ‘strengthened in recent months’

Among the biggest drags on the benchmark, AT&T saw its worst drop in more than two years, while Apple, Amazon and Exxon Mobil each sank at least 2.2%. Now 2.8% from its all-time high, the S&P 500 trades at 18.2 times forecast earnings, still the highest since at least 2009.

“Boring utilities and other defense trades started behaving like Apple in the glory days or hot biotech stocks, and it attracted momentum players, so that’s another factor embedded in this,” Michael Purves, chief global strategist at Weeden, said. “Today what we’re having is an unwind of the 10-year that’s been so key to that support -- the equity move today has been more about the 10-year.”

Slideshow
Top funds: Highest returns, lowest costs
For value-minded clients, here are the cheapest funds (10 basis points or less) with the best 3-year performances.

Following Rosengren’s comments, traders briefly pushed bets for a rate increase this month to 38%, before moderating to 30%. Odds fell to 22% on Wednesday following a string of weaker-than-forecast gauges on hiring, manufacturing and services activity. December is the first month with at least an even chance for a move. Next week’s reports on retail sales, consumer sentiment and industrial production are among the last major economic releases before the central bank meets Sept. 20-21.

Fed Governor Lael Brainard, seen as a leading opponent of rate increases for much of the past year, is scheduled to deliver a speech in Chicago Monday outlining her views on the economy and monetary policy.

The yield on the 10-year U.S. Treasury note rose Friday to a more than two-month high.

“This is a big move in yields the last couple days,” Mark Kepner, managing director and equity trader at Themis Trading, said. “If you’re going to get a big move in the bond market, equities can only be under pressure and we’re seeing it already. Investors do not like a move like this so fast.”

Read more: Brexit's implications for Yellen's Fed come with a timeline

The S&P 500 capped its first move of at least 1% after 43 sessions, the longest such streak since 2014, as it broke below a roughly 30-point range it’s held for about two months. The gauge had hovered near a record reached on Aug. 15 amid mixed economic data and speculation about the Fed’s stance on rates. It closed Thursday up 19% from a 22-month low in February, and less than half a percent from its all-time high.

“It’s really difficult to be an investor in U.S. equities right now because benchmarks are just glued to those all-time highs,” said Steven Santos, a broker at Banco de Investimento Global. “There isn’t much conviction to really push stocks higher, but you also don’t want to completely give up on stocks when returns elsewhere look miserable.”

Adding to the angst over the prospects for higher borrowing costs, DoubleLine Capital Chief Investment Officer Jeffrey Gundlach said it’s time to prepare for rising rates and inflation. “This is a big, big moment,” Gundlach said during a webcast Thursday. “Interest rates have bottomed. They may not rise in the near term as I’ve talked about for years. But I think it’s the beginning of something and you’re supposed to be defensive.”

Register or login for access to this item and much more

All On Wall Street content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access