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NEW YORK (AP) — The Dow Jones Industrial Average sank more than 1,250 points Tuesday, its steepest sell-off in more than two years, after a government report showed that inflation is maintaining a surprisingly strong grip on the U.S. economy.
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 four-day 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 drop didn’t quite knock out its gains
over the past four days. The index is now down 17.5% so far this year.
The Dow lost
1,276.37 points to 31,104.97, and the Nasdaq dropped 632.84 points to
11,633.57.
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.
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.
“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.”
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
one-in-three chance for a rate hike of a full percentage point by the Fed next
week. That would be quadruple the usual move, and no one in the futures market
was predicting such a hike a day earlier.
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 currently in a range of 2.25% to 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.”
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. The hope is that the Fed
can pull off the tightrope walk of slowing the economy enough to snuff out high
inflation, but not so much that it creates a painful recession.
Tuesday’s data
puts hopes for such a “soft landing” under more threat. In the meantime, higher
rates also push down on prices for stocks, bonds and other investments.
Investments
seen as the most expensive or the riskiest are the ones hardest hit by higher
rates. Bitcoin tumbled 9.4%.
To be sure,
the stock market’s 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.
Treasury
yields leaped immediately on expectations for a more aggressive Fed. The yield
on the two-year Treasury, which tends to track expectations for Fed actions,
soared to 3.74% from 3.57% late Monday. The 10-year yield, which helps dictate
where mortgages and rates for other loans are heading, rose to 3.42% from
3.36%.
Expectations
for a more aggressive Fed also helped the dollar add to its already strong
gains for this year. The dollar has been surging against other currencies in
large part because the Fed has been hiking rates faster and by bigger margins
than many other central banks.
AP Business
Writer Damian J. Troise contributed. Veiga reported from Los Angeles.