Americans who play the stock market are suffering, but at least there’s no mean tweets, right? In fact, Donald Trump once suggested that if Joe Biden was elected, that the stock market would crash and things could be heading in that direction according to analysts.
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A rise in U.S. inflation unexpectedly brought on the worst selloff on Wall Street since the early days of the pandemic. The rise raised fears that the Federal Reserve would need to take more aggressive measures to combat accelerating inflation. As a result, the S&P 500 suffered its biggest drop since June 2020, falling 4.3%. The Dow Jones was down 3.9% and the Nasdaq composite closed down 5.2%. Major stock indexes ended a four-day winning streak and reversed an early rally in European markets.
In detail, the S&P 500 fell to 3,932.69 or 4.32%. The Dow Jones Industrial Average slid 1,276.37 points, or 3.94%, to close at 31,104.97. The Nasdaq Composite dropped 5.16% to end that day at 11,633.57. Only five stocks in the S&P 500 finished in positive territory. The tech sector was particularly hard hit: Facebook parent Meta dropped 9.4% and chip maker Nvidia dropped 9.5%.
As a result of the decline, nearly all of the recent rally in stocks was erased, causing the S&P 500 to fall back toward its September 6 close of 3,908 and forcing traders to retreat to mid-June, when the index fell below 3,700, said a report on Time. Moreover, bond prices dropped, pushing up their yields, after a report showed that inflation in August was only 8.3 percent, not the 8.1 percent economists expected.
With the Federal Reserve’s interest rate rising even higher than expected due to the hotter-than-expected reading, traders are bracing for economic risks resulting from higher interest rates. The prices of everything from gold to crypto-currencies to crude oil have been driven down by fears of higher rates.
Brian Jacobse, a senior investment strategist at Allspring Global Investments stated, “Right now, it’s not the journey that’s a worry so much as the destination. If the Fed wants to hike and hold, the big question is at what level.”
Most of Wall Street entered the day expecting the Fed to raise its short-term policy rate by three-quarters of a percentage point at its next meeting. But the expectation was that inflation was rapidly dropping back to more normal levels after a June peak of 9.1 percent. Now, the hopes are crushed.
“This piece of data just hammered home that the Fed isn’t going to have the data to do anything differently than continue on their rate-raising path for longer,” Tom Martin, a senior portfolio manager with Globalt Investments declared. “It just increases the chance of an actual recession.”
The August Consumer Price Index report indicated a higher than expected reading for inflation. Headline inflation increased 0.1 percent month-over-month, even with the drop in gasoline prices. Core inflation grew 0.6 percent month-over-month. On an annual basis, inflation was 8.3 percent.
The benchmark interest rate has already been raised by the Fed four times this year, the last two increases amounting to three-quarters of a percentage point. The current range for the federal funds rate is 2.25% to 2.50%. Higher rates make it more difficult to buy a home, car, or anything else bought on credit, hurting the economy.