NEW YORK— Stocks tumbled to their worst day in more than two years Tuesday, knocking the Dow Jones Industrial Average down more than 1,250 points, following Wall Street’s humbling realization that inflation is not slowing as much as hoped.
The S&P 500 sank 4.3%, its biggest drop since June 2020. The Dow lost 3.9% while the Nasdaq Composite closed at 5.2%. This sell-off ended the four-day winning streak of major stock indexes, and erased any early gains in European markets.
The yields of bonds fell steeply after an August report revealed that inflation was only 8.3% rather than 8.1% as economists had expected.
Traders are bracing themselves for an increase in Federal Reserve interest rates to fight inflation. This is despite the fact that the reading was hotter than anticipated. Prices dropped for everything, including gold, cryptocurrencies and crude oil because of fears about rising rates.
“Right now, it’s not the journey that’s a worry so much as the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to hike and hold, the big question is at what level.”
The S&P 500 fell 177.72 points to 3,932.69. The drop didn’t quite knock out its gains over the past four days. So far in the year, it is down 17.5%.
Dow dropped 1,276.37 points, to 31104.97. The Nasdaq fell 632.84 points, to 11,633.57. Big tech stocks swooned more than the rest of the market, as all 11 sectors that make up the S&P 500 sank.
Wall Street believed that the Fed would increase its key short term rate by three-quarters to a point next week. However, the expectation was that inflation would quickly fall to less normal levels following its June peak at 9.1%.
This was supposed to allow the Fed’s rate increases to decrease through the end year. The Fed could then hold the steady position through 2023.
Tuesday’s report dashed some of those hopes.
“This piece of data just hammered home that the Fed isn’t going to have the data to do anything differently than continue on their rate-raising path for longer,” said Tom Martin, senior portfolio manager with Globalt Investments. “It just increases the chance of an actual recession.”
Numerous data points in the report on inflation were more severe than expected by economists, and some that the Fed is particularly concerned with, like inflation other than food prices.
According to Gargi Chaudhuri (head of investment strategy, iShares), the market converged on a 0.6% increase in these prices in August, compared with July. This was double what economists had expected.
Inflation figures that were much higher than anticipated have traders now seeing a three-in-three chance of the Fed raising rates by a full percentage point next week. This would quadruple what is usual, and nobody in futures was anticipating such a move a day before.
With the exception of two recent increases, which were three-quarters to a percentage point in size, the Fed’s benchmark interest rate has been raised four times already this year. The Federal Funds Rate currently ranges between 2.25% and 2.50%.
“The Fed can’t let inflation persist. You have to do whatever is necessary to stop prices from going up,” said Russell Evans, managing principal at Avitas Wealth Management. “This indicates the Fed still has a lot of work to do to bring inflation down.”
The economy is hurt by higher rates. It becomes more costly to purchase a home, car, or any other item on credit. Housing industry has been suffering since mortgage rates reached the highest point since 2008; they have also seen a rise in interest rates. We hope that the Fed is capable of balancing the fine line between slowing the economy to contain high inflation and not causing a recession.
Tuesday’s data puts hopes for such a “soft landing” under more threat. Higher rates are also causing prices to drop for stocks and bonds, as well as other investment options.
Higher rates are most likely to affect investments that are considered the most costly or riskiest. Bitcoin fell 9.4%.
In the stock market, all but six of the stocks in the S&P 500 fell. Technology and other high-growth companies fell more than the rest of the market because they’re seen as most at risk from higher rates.
To be sure, the losses only return the S&P 500 close to where it was before its recent winning streak. That run was built on hopes that Tuesday’s inflation report would show a more comforting slowdown. The ensuing wipeout fits what’s become a pattern on Wall Street this year: Stocks fall on worries about inflation, turn higher on hopes the Fed may ease up on rates and then fall again when data undercuts those hopes.
The expectations of a stronger Fed drove the Treasury yields to record levels. On Monday, the yield on the Treasury’s two-year Treasury rose to 3.74%, from 3.57%. The yield on the 10-year Treasury, which is used to determine where other loan rates and mortgage rates are headed, increased by 3.42% to 3.36%.
The dollar’s strong performance this year was also helped by expectations of a Fed that is more aggressive. Because the Fed raises rates quicker and more frequently than most central banks, dollar is gaining against all other currencies.
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Damian J. Troise, AP Business writer contributed. Veiga reported in Los Angeles.
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