Stocks sag as persistent inflation weighs on investors

Most stocks marched lower Wednesday as stubbornly sticky inflation has Wall Street bracing for interest rates to stay higher for longer.

The S&P 500 fell 0.5% on the day. The Dow Jones Industrial Average gained less than 0.1%, while the Nasdaq composite fell 0.7%.

After a hot start to the year, the stock market has struggled as recent data showed inflation and the overall economy are proving more resilient than expected. That has forced many investors to delay their forecasts for a recession to later this year, while also raising their expectations for how high the Federal Reserve will raise interest rates.

Higher rates can drive down inflation, but also hurt the economy by making borrowing more expensive. Higher rates also drag down prices for stocks and other investments.

Wall Street got another reminder of inflation’s stubbornness from the latest report to show U.S. manufacturing is weakening. A report from the Institute for Supply Management said a measure of prices paid rose in February and hit its highest level since September.

“The biggest risk to markets is an economy that stagnates yet continues to struggle with nagging inflation pressures,” said Jeffrey Roach, chief economist for LPL Financial, in a note to investors.

The market’s expectations have firmed for the Fed to stay aggressive to ensure inflation falls toward its 2% goal. Traders have pulled back bets the central bank will cut rates this year, and some have increased bets policymakers will reaccelerate the pace of rate increases later this month.

The widespread expectation is now for the Fed to raise its key overnight rate to at least 5.25% by June. Some bets are calling also for the rate to top 5.50%, which would be its highest level since 2001. The rate is currently in a range of 4.50% to 4.75% after starting 2022 at basically zero.

Treasury yields rose immediately after the release of the manufacturing data. The yields had shot higher in February as expectations rose for the Fed and rates.

Several big-name retailers have already offered discouraging forecasts for the upcoming year given the challenges U.S. households are facing because of high inflation and other factors.

Kohl’s Corp. fell 1.9% after following suit. The retailer also said it swung to a surprise loss for the three months through Jan. 28.

Ross Stores Inc. edged up 0.1% after spending most of the day lower despite reporting better profit and revenue than expected for the latest quarter. The company gave a profit forecast for the year that fell short of Wall Street’s expectations.

Ross Stores CEO Barbara Rentler said the company wanted to be conservative given the uncertainty about the U.S. economy and other global factors. She said high inflation is continuing to hit lower- to moderate-income customers.

Vaccine company Novavax Inc. tumbled 25.9% after warning there’s “substantial doubt” about its ability to stay in business over the next year. It reported a net loss of $657.9 million for the last year.

Lowe’s Companies Inc. fell 5.6% for one of the largest losses in the S&P 500 after the company reported weaker revenue than expected for the latest quarter.

On the winning side was First Solar Inc., which jumped 15.7% after reporting stronger results than expected for the latest quarter.

All told, the S&P 500 fell 18.76 points to 3,951.39. The Dow rose 5.14 points to 32,661.84, and the Nasdaq fell 76.06 points to 11,379.48.

Stock markets overseas were strong after encouraging data on the world’s secondlargest economy. Hong Kong’s Hang Seng Index jumped 4.2% and stocks in Shanghai gained 1% after reports on manufacturing in China showed a strong recovery after anti-virus controls were lifted late last year.

That followed a slump in activity that dragged last year’s economic growth to 3%, China’s second-lowest level since at least the 1970s.

In the bond market, the yield on the 10-year U.S. Treasury rose to 3.99% from from 3.93% late Tuesday. It helps set rates for mortgages and other loans that shape the economy, and it’s near its highest level since November after topping 4% earlier in the day. The twoyear yield, which moves more on expectations for the Fed, rose to 4.89% from 4.82%.