Wall Street experienced a significant decline on Tuesday as the Dow Jones Industrial Average plummeted 500 points due to disappointing inflation data. This news has left investors concerned about the possibility of high interest rates persisting for a longer period than anticipated. The S&P 500 also fell by 1.4 percent, delaying forecasts for when the Federal Reserve will deliver the interest rate cuts that traders are eagerly awaiting. The Nasdaq composite, which had been flirting with its all-time high from 2021, sank by 1.8 percent.
The impact of high interest rates is felt across various investment sectors, but it particularly affects high-growth stocks such as technology companies. This was evident with Microsoft experiencing a 2.2 percent drop and Amazon tumbling by 2.1 percent, both of which heavily influenced market performance.
The losses were widespread, with nearly 90 percent of stocks in the S&P 500 falling. This represents one of the most significant setbacks for the index since its record-setting rally began in late October. The rise in stock prices during this period was largely driven by hopes that inflation would cool enough for the Federal Reserve to implement rate cuts and relieve pressure on the economy.
Smaller companies were hit even harder by the news, as high interest rates can make it more challenging for them to borrow cash compared to their larger counterparts. The Russell 2000 index of smaller stocks plunged by 4 percent, marking its worst day since two summers ago.
Analysts warn that the disappointing inflation data could result in further delays to rate cuts and even the possibility of rate increases. The Federal Reserve has already raised its main interest rate to the highest level since 2001 in an attempt to combat high inflation. While high rates slow down the overall economy, it is important to note that this is just one data point following several months of encouraging trends where inflationary pressures eased.
Chris Larkin, managing director of trading and investing at E-Trade from Morgan Stanley, believes that the longer-term trend of cooling inflation is still in place. He suggests that today’s events serve as a reminder of why the Federal Reserve has been inclined to wait before implementing rate cuts.
Despite this perspective, the reaction across Wall Street was immediate and fierce. Yields in the bond market jumped as traders adjusted their expectations for the Federal Reserve to maintain high rates for a longer period. The yield on the 10-year Treasury rose to 4.31 percent, while the two-year Treasury yield leaped to 4.66 percent.
While the likeliest outcome is still for the economy to navigate a soft landing without a painful recession, there is still a risk that conditions could shift to one extreme or another. Alexandra Wilson-Elizondo, co-chief investment officer of the multi-asset solutions business at Goldman Sachs Asset Management, suggests that either the economy could fall into a recession due to high interest rates or inflation could reaccelerate due to falling Treasury yields and rising stock prices in anticipation of rate cuts.
This news has forced traders to recalibrate their expectations for rate cuts, bringing them closer to what the Federal Reserve has outlined. Previously, traders had been forecasting as many as six rate cuts in 2024, but now they are largely betting on three or four cuts.
Critics have warned that stock prices may have risen too far too quickly, driven by overly optimistic hopes for rate cuts and other factors. However, on a positive note, many companies have been surpassing analysts’ profit forecasts in the latest quarter.
In terms of individual stocks, Arista Networks reported stronger earnings and revenue than expected but still saw its stock drop by 5.5 percent. Analysts believe this decline may be due to investors hoping for a better forecast for upcoming results from the company. Moody’s also experienced a significant loss of 7.9 percent after reporting weaker profits than anticipated.
Amidst the losses, JetBlue Airways emerged as a winner, with its stock soaring by 21.6 percent after activist investor Carl Icahn revealed his ownership stake in the airline and expressed his belief that the stock is undervalued.
Overall, the S&P 500 fell by 68.67 points to 4,953.17, the Dow dropped by 524.63 points to 38,272.75, and the Nasdaq sank by 286.95 points to 15,655.60.
In international stock markets, European indexes also experienced declines, while Asian markets were closed for holidays with the exception of Japan’s Nikkei 225, which jumped by 2.9 percent, and South Korea’s Kospi, which gained 1.1 percent.
As investors grapple with the implications of disappointing inflation data and the potential impact on interest rates, the future direction of Wall Street remains uncertain.
