Business

Dow books near 1,300-point drop as stocks record worst day since June 2020

The Dow Jones Industrial Average closed nearly 1,300 points lower on Tuesday as technology stocks led the market to its worst day since June 11, 2020, following an unexpected surge in consumer price inflation in August.

What happened
  • The Dow Jones Industrial Average DJIA,
    -3.94%
    fell 1,276.37 points, or 3.9%, to end at 31,104.97.

  • The S&P 500 SPX,
    -4.32%
    lost 177.72 points, or 4.3%, to finish at 3,932.69.

    Read:Aldi confirms major change that will affect anyone who buys semi-skimmed milk
  • The Nasdaq Composite COMP,
    -5.16%
    fell 632.84 points, or 5.2%, to close at 11,633.57.

  • That was the largest daily percentage drop for all three indices since June 11, 2020, according to Dow Jones Market Data.

Popular index-tracking exchange-traded funds, including the SPDR S&P 500 ETF Trust SPY,
-4.35%
and the SPDR Dow Jones Industrial Average Trust ETF DIA,
-3.96%
decreased by 4% or more. The technology-focused Nasdaq-100 NDX,
-5.54%
and the Invesco QQQ Trust ETF QQQ,
-5.48%
both lose 5.5%.

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What drove markets

All 11 S&P 500 sectors ended in the red after the August consumer price index, or CPI, rose 0.1% in August. Although year-on-year rates slowed to 8.3% from 8.5% in July, economists had been anticipating a monthly decline of 0.1%, which would push the year-on-year rate down to 8%.

Meanwhile, excluding volatile food and energy prices, core rates rose 0.6%, up 6.3% year-over-year, beating expectations for a 0.3% monthly increase and a 6% year-on-year rate.

To see: US inflation rages back in August, CPI shows, despite falling gas prices

That fueled fears that inflation could be firmer than economists had anticipated — which in turn could force the Federal Reserve to hold on to its aggressive monetary policy tightening for longer, or at least a backlash to lower interest rates in the near future. to stand in the way.

As stocks fell, losses increased in the last hour of trading, increasing volatility, with the Cboe Volatility Index, also known as “the VIX”, VIX,
+14.24%
increases by more than 16% to 27.79.

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“Markets were rocked by an annoying CPI print this morning and are responding in kind,” said Cliff Hodge, chief investment officer for Cornerstone Wealth in Charlotte, North Carolina. “Mistakes in both the headline and core are disappointing as this inflation wave is proving to be anything but ‘transient’. Unfortunately for the markets, this imprint will reinforce the need for the Fed to remain aggressive and likely contain risky assets for the foreseeable future.”

The data bolsters expectations that the Federal Reserve will raise Fed Funds interest rates by another 75 basis points when it meets next week, with Fed Funds futures having about a 40% chance of a 100 basis point increase.

To see: The biggest Fed rate hike in 40 years? It might come

The yield on the policy-sensitive 2-year bond BX:TMUBMUSD02Y rose 18.3 basis points to 3.754%, reaching its highest level in nearly 15 years and further inverting the yield curve – a phenomenon that is seen as a reliable indicator of recession.

“Today’s inflation print is not the data the Fed wanted the week before” making an important decision about the key rate,” said Charlie Ripley, senior investment strategist for Allianz Investment Management in Minneapolis. “With core inflation rising twice as fast as economists’ expectations and annualized inflation, eroding food and energy, to 6.3%, the Fed clearly has work ahead of it.”

“Overall, inflation rates remain unacceptably high for policymakers. Coupled with a still strong labor market, the data seals the deal for another aggressive 75 basis point rate hike next week,” Rubeela Farooqi, chief US economist at High Frequency Economics, said in a note.

To see: Any lingering doubts that the Fed will get big with the next rate hike is now gone

As stocks plummeted, the US dollar strengthened as investors took refuge in the safety of the greenback, while higher yields also made the dollar more attractive. The ICE US Dollar Index DXY,
+1.48%,
a measure of the dollar’s strength compared to a basket of its main rivals, rose 1.4% to 109.88, close to its highest level in two decades.

Companies in the picture
  • Megacap technology stocks and consumer loyalties helped lead Tuesday’s sell-off. Apple Inc.
    AAPL,
    -5.87%,
    Microsoft Corp.
    MSFT,
    -5.50%,
    Amazon.com Inc.
    AMZN,
    -7.06%,
    Alphabet Inc.
    GOOGL,
    -5.90%
    and Tesla Inc.
    TSLA,
    -4.04%
    all were down 4% or more with Meta down 9.4% and Amazon down 7.1%.

  • The so-called unprofitable tech names such as those in the ARK Innovation exchange-traded fund
    ARKK,
    -6.79%
    were among the worst performers on Tuesday. The ARK ETF lost 6.8%.

  • Oracle Corp.
    ORCL,
    -1.35%
    late Monday reported lower gains than expected on Monday, and executives’ earnings expectations also came in lower than analysts had expected as a strengthening dollar took its toll. The stock ended 1.4% lower.

  • Peloton Interactive Inc.
    PTON,
    -10.32%
    said late Monday it has accepted the resignation of co-founders John Foley and Hisao Kushi, the latest leadership shakeup to hit the troubled interactive fitness company. The stock fell 10.3%.

  • Online clothing rental platform Rent the Runway Inc.
    RENT,
    -38.74%
    Monday announced plans to cut the company’s workforce after demand faltered for the summer season. The stock fell 38.7%.

  • Only a handful of S&P 500 companies ended in the green on Tuesday, including Twitter Inc. and four material stocks that focus on fertilizer: Albertmarle Corp.
    ALB,
    +0.38%,
    Corteva Inc.
    CTVA,
    +0.87%,
    CF Industries Holdings Inc.
    CF,
    +0.67%
    and Mosaic Company
    MOSS,
    +0.32%.
    All 11 S&P 500 sectors were in the red.

—Steve Goldstein contributed to this article.

Listen to Ray Dalio at the Best New Ideas in Money Festival on September 21 and 22 in New York. The hedge fund pioneer has strong views on where the economy is headed.

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