NEW YORK (AP) — The Dow Jones Industrial Average fell more than 1,250 points on Tuesday, its biggest selloff in more than two years, after a government report showed inflation is maintaining a surprisingly strong grip on the American economy.
The S&P 500 fell 4.3%, its biggest decline since June 2020. The Dow Jones fell 3.9% and the Nasdaq composite closed down 5.2%. The sell-off ended a four-day winning streak for major stock indices and erased an early rally in European markets.
Bond prices also fell sharply, pushing up their yields, after a report showed inflation slowed to just 8.3% in August.instead of the 8.1% expected by economists.
The warmer-than-expected reading has traders bracing for the Federal Reserve to eventually raise interest rates even higher than expected to fight inflation, with all the risks to the economy that entails. Fears over higher rates have sent prices plummeting for everything from gold to cryptocurrencies to crude oil.
“Right now, it’s not so much the journey that’s of concern as the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to rise and hold, the big question is how high.”
The S&P 500 fell 177.72 points to 3,932.69. The decline hasn’t quite reversed its gains over the past four days. The index is now down 17.5% since the start of the year.
The Dow lost 1,276.37 points to 31,104.97 and the Nasdaq lost 632.84 points to 11,633.57.
All but six S&P 500 stocks fell. Technology and other high-growth companies fell more than the rest of the market as they are considered most at risk from higher rates.
Most of Wall Street entered the day expecting the Fed to raise its key short-term rate by three-quarters of a percentage point at its meeting next week. But the hope was that inflation was rapidly falling back to more normal levels after peaking in June at 9.1%.
The idea was that such a slowdown would allow the Fed to scale back the magnitude 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 data just hammers home that the Fed won’t have the data to do anything but continue on its rate hike path any longer,” said Tom Martin, senior portfolio manager at Globalt Investments. “It just increases the risk of a real recession.”
Many data points in the inflation report were worse than economists expected, including some the Fed pays close attention to, such as inflation outside of food and energy prices.
Markets focused on a 0.6% rise in those prices in August from July, double what economists expected, said Gargi Chaudhuri, head of investment strategy at iShares.
Inflation numbers were so much worse than expected that traders now see a one in three chance of a one percentage point rate hike by the Fed next week. That would be four times the usual move, and no one in the futures market was predicting such a rise a day earlier.
The Fed has already raised its benchmark interest rate four times this year, 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 cannot let inflation persist. You must do whatever is necessary to keep prices from rising,” said Russell Evans, managing director of Avitas Wealth Management. “It indicates that 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, car, or anything else purchased on credit. Mortgage rates have already reached their highest level since 2008, creating difficulties for the housing industry. The hope is that the Fed can successfully walk the tightrope of slowing the economy enough to quell high inflation, but not so much as to create a painful recession.
Tuesday’s data puts hopes of such a “soft landing” under greater threat. In the meantime, higher rates also drive down the prices of stocks, bonds, and other investments.
Investments considered the most expensive or riskiest are the hardest hit by rising rates. Bitcoin fell 9.4%.
To be sure, the stock market’s losses only bring the S&P 500 back close to where it was before its recent winning streak. This run was built on hopes that Tuesday’s inflation report would show a more comforting slowdown. The ensuing wipeout matches what has become a trend on Wall Street this year: stocks fall on inflation worries, rise in hopes the Fed might ease rates, then fall again when the data undermines those hopes.
Treasury yields immediately jumped on expectations of a more aggressive Fed. The two-year Treasury yield, which tends to track Fed stock expectations, climbed to 3.74% from 3.57% late Monday. The 10-year yield, which helps dictate the direction of mortgages and other loan rates, rose to 3.42% from 3.36%.
Expectations of a more aggressive Fed also helped the dollar add to its already strong gains for this year. The dollar surged against other currencies largely because the Fed raised rates faster and with wider margins than many other central banks.
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AP Business Writer Damian J. Troise contributed. Veiga reported from Los Angeles.
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