Dow drops nearly 1,300 points as stocks post worst day since June 2020

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The Dow Jones Industrial Average closed down nearly 1,300 points on Tuesday as tech stocks led the market to its worst day since June 11, 2020, following an unexpected spike in price inflation at the consumption 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.

  • The Nasdaq Composite COMP,
    -5.16%
    fell 632.84 points, or 5.2%, to close at 11,633.57.

  • This is the largest daily percentage decline for all three indices since June 11, 2020, according to Dow Jones Market Data.

Popular index 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%
fall of 4% or more. The Nasdaq-100 NDX concentrated in technology,
-5.54%
and Invesco QQQ QQQ Trust ETF,
-5.48%
both lost 5.5%.

What drove the markets

All 11 sectors of the S&P 500 ended in the red after the consumer price index, or CPI, rose 0.1% in August. Although the year-on-year rate slowed to 8.3% from 8.5% in July, economists expected a 0.1% monthly decline that would bring the year-on-year rate down. the other at 8%.

Meanwhile, the base rate, which excludes volatility in food and energy prices, rose 0.6%, up 6.3% year-on-year, beating expectations for a hike. 0.3% monthly and a 6% year-on-year pace.

See: US inflation rebounds in August, according to the CPI, despite the fall in gasoline prices

This fueled fears that inflation could be more rigid than economists had expected – which in turn could force the Federal Reserve to maintain its aggressive monetary policy tightening for longer, or at least prevent a return to lower interest rates.

As stocks tumbled, losses accelerated in the final hour of trading, causing volatility to spike, with the Cboe Volatility Index, otherwise known as “VIX”, VIX,
+14.24%
up more than 16% to 27.79.

“Markets were rattled by a poor CPI print this morning and are reacting accordingly,” said Cliff Hodge, chief investment officer for Cornerstone Wealth in Charlotte, North Carolina. “The misfires on both the headline and the core are disappointing as this surge in inflation proves to be anything but ‘transient’. Unfortunately for markets, this impression will reinforce the need for the Fed to remain aggressive and likely maintain a cap on risky assets for the foreseeable future.

The data appears to cement expectations that the Federal Reserve will raise the federal funds rate by another 75 basis points at its meeting next week, with federal funds futures showing a roughly 40% chance of a increase of 100 basis points.

See: Biggest Fed rate hike in 40 years? It could come

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

“Today’s inflation is not the data the Fed wanted to see the week before they make an important policy rate decision,” said Charlie Ripley, senior investment strategist for Allianz Investment Management in Minneapolis. “With core inflation rising twice as fast as economists expected and the annualized inflation rate, excluding food and energy, hitting 6.3%, the Fed clearly has its work cut out for it. .”

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

See: Any lingering doubt that the Fed will go big with the next rate move is now gone

As stocks fell, the US dollar strengthened as investors sought refuge in the safety of the greenback, while higher yields also made the dollar more attractive. The ICE US Dollar Index DXY,
+0.04%,
an indicator of the greenback’s strength against a basket of its major rivals, rose 1.4% to 109.88, near the highest level in two decades.

Companies in the spotlight
  • Tech stocks Megacap and consumer discretionary stalwarts helped lead Tuesday’s selloff. 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 fell 4% or more with Meta down 9.4% and Amazon down 7.1%.

  • So-called unprofitable tech names like those held in the ARK Innovation Listed Index Fund
    ARKK,
    -6.79%
    were among the worst performers on Tuesday. ETF ARK lost 6.8%.

  • Oracle Corp.
    ORCL,
    -1.35%
    On Monday evening, earnings fell short of expectations and executives’ earnings forecast also fell short of analysts’ expectations as the strengthening dollar took its toll. The shares ended down 1.4%.
  • Interactive Peloton Inc.
    PTON,
    -10.32%
    said Monday night that he had accepted the resignations of co-founders John Foley and Hisao Kushi, the latest management shakeup to hit the struggling interactive fitness company. The shares fell 10.3%.
  • Online clothing rental platform Rent the track inc.
    LEASE,
    -38.74%
    on Monday announced plans to cut staff at the company after demand for the summer season faltered. The shares fell 38.7%.

  • Only a handful of S&P 500 companies ended in the green on Tuesday, including Twitter Inc. and four fertilizer-focused materials stocks: Albermarle Corp.
    ALB,
    +0.38%,
    Corteva Inc.
    VAT,
    +0.87%,
    CF Industries Holdings Inc.
    heart rate,
    +0.67%
    and Mosaic Society
    MOS,
    +0.32%.
    All 11 sectors of the S&P 500 were trading in the red.

—Steve Goldstein contributed to this article.

Listen to Ray Dalio on the Best New Ideas in Money Festival September 21 and 22 in New York. The hedge fund pioneer has a strong opinion on the direction of the economy.

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