Stocks fell sharply on Tuesday after a key August inflation report came in hotter than expected, hurting investor optimism for cooling prices and a less aggressive Federal Reserve.
The Dow Jones Industrial Average slid 1,276 points, or 3.9%. The S&P 500 dropped about 4.3%, and the Nasdaq Composite sank more than 5%. More than 490 stocks in the S&P 500 fell, with Facebook-parent Meta dropping 8% and Caesars Entertainment losing 7.3%.
The drop erased nearly all of the recent rally for stocks, pulling the S&P 500 back toward its Sept. 6 close of 3,908 and causing some traders to glance back at mid-June, when the index fell below 3,700.
“I think we may even go back and retest the June lows,” UBS director of floor operations Art Cashin said Tuesday on CNBC’s “Squawk on the Street.”
“Certainly the 3900 is just so tempting, and you’re pulling back below the 50-day moving average here. It’s very much about the technicals. It’s not so much that the one number made the economy go topsy-turvy. It meant a lot of guys who were making preliminary favorable bets got caught off base,” he said.
The August consumer price index report showed a higher-than-expected reading for inflation. Headline inflation rose 0.1% month over month, even with falling gas prices. Core inflation rose 0.6% month over month. On a year-over-year basis, inflation was 8.3%.
Economists surveyed by Dow Jones had been expecting a decline of 0.1% for overall inflation, with a rise of 0.3% for core inflation.
The report is one of the last the Fed will see ahead of their Sept. 20-21 meeting, where the central bank is expected to deliver their third consecutive 0.75 percentage point interest rate hike to tamp down inflation. The unexpectedly high August report could lead the Fed to continue its aggressive hikes longer than some investors anticipated.
The moves comes after four straight positive sessions for U.S. stocks, which were bolstered in part by the belief of many investors that inflation had already peaked.
“The CPI report was an unequivocal negative for equity markets. The hotter than expected report means we will get continued pressure from Fed policy via rate hikes,” said Matt Peron, director of research at Janus Henderson Investors. “It also pushes back any ‘Fed pivot’ that the markets were hopeful for in the near term.”
The sell-off was particularly painful in high-growth tech stocks. Cloudflare fell more than 9%, while Unity Software sank 12%. Shares of direct-to-consumer auto retailer Carvana slid more 13%, making it one of the worst performers on the New York Stock Exchange.