Dow Jones has worst day since June 2020
On more inflation fears, stocks fall by 1,276 points
NEW YORK — Stocks tumbled to their worst day in more than two years Tuesday, knocking the Dow Jones Industrial Average down more than 1,276 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 fell 3.9% and the Nasdaq composite closed 5.2% lower. The sell-off ended a fourday winning streak for the major stock indexes and erased an early rally in European markets.
Bond prices also fell sharply, sending their yields higher, after a report showed
inflation decelerated only to 8.3% in August, instead of the 8.1% economists expected.
The hotter-than-expected reading has traders bracing for the Federal Reserve to ultimately raise interest rates even higher than expected to combat inflation, with all the risks for the economy that entails. Fears about higher rates sent prices dropping for everything from gold to cryptocurrencies to crude oil.
“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 index is now down 17.5% this year.
The Dow lost 1,276.37 points to 31,104.97, and the Nasdaq dropped 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.
Most of Wall Street came into the day thinking the Fed would hike its key short-term rate by a hefty three-quarters of a percentage point at its meeting next week. But the hope was that inflation was in the midst of quickly falling back to more normal levels after peaking in June at 9.1%.
The thinking was that such a slowdown would let the Fed downshift the size of its rate hikes through the end of this year and then potentially hold steady through early 2023.
Tuesday’s report dashed some of those hopes.
Many of the data points within the inflation report were worse than economists expected, including some the Fed pays particular attention to, such as inflation outside of food and energy prices.
Markets honed in on a 0.6% rise in such prices during August from July, double what economists expected, said Gargi Chaudhuri, head of investment strategy at iShares.
The inflation figures were so much worse than expected that traders now see a 1 in 3 chance for a rate hike of a full percentage point by the Fed next week. That would be quadruple the usual move.
The Fed has already raised its benchmark interest rate four times this year, with the last two increases by three-quarters of a percentage point.
The federal funds rate is in a range of 2.25% to 2.50%.
“This indicates the Fed still has a lot of work to do to bring inflation down,” said Russell Evans, managing principal at Avitas Wealth Management.
Higher rates hurt the economy by making it more expensive to buy a house, a car or anything else bought on credit.
Mortgage rates have already hit their highest level since 2008, creating pain for the housing industry.