It is a new day for the US stock market with equity futures trading in green. However, yesterday was the red-letter day for the US stocks when the US stock market went all the way down with the three leading indices recording big losses on Tuesday. The Dow fell 1,276.37 points, or 3.94%, to settle at 31104.97 while the S&P 500 declined 177.72 points, or 4.32%, to close at 3932.69 and the Nasdaq Composite slid 632.84 points, or 5.16%, to end the day’s session at 11633.57. The declines left the Dow 30 index down 14.4% in 2022, while the S&P 500 has lost 17.49% and Nasdaq Composite has retreated 25.64%.
US stocks had their worst day in more than two years after the US CPI data for August 2022 showed inflation refusing to come down in a hurry. Investors sold everything, including stocks, bonds, gold, and even oil. The S&P 500’s 11 sectors, along with all 30 of the Dow Jones Industrial Average’s equities, all experienced declines.
Wall Street investors know that a high-interest rate scenario will dent corporate profits and impact the company’s margins. In addition, the measures taken by US Fed, to bring down inflation to under 2%, could damage the economic conditions further. A full-blown US recession may have serious repercussions for the market as well.
At a four-decade high and sticky inflation, US Fed may have to move quickly in hiking rates. Already, the talk of a 100 bps as against 75 bps has begun and the recent fall in the market may be a reflection of it. The most likely scenario remained an increase of 0.75 percentage points. The market will pay close attention to Fed Chairman Jerome Powell’s comments on the outlook when the Fed’s FOMC decides on the next rate hike on September 21–22.
August US CPI index rose by 8.3%. From 8.6% in May, US inflation rose to 9.1% in June and later fell to 8.5% in July showing the inflation is still persistent and refusing to come down.
Inflation, in fact, accelerated in August on a month-to-month basis, dispelling investors’ expectations that price pressures would lessen and let the Federal Reserve moderate the pace of interest rate rises in the following months.
Fed Chairman Jerome Powell had clearly stated that the goal of the central bank is to reduce high inflation in order to keep it from becoming ingrained like it did in the 1970s. While most investors anticipate more stock market volatility, some believe the economy is still robust enough to prevent a significant leg down from the current levels of the market.