Dow Plummets on Shocking Inflation Data

The Dow Jones Industrial Average suffered its biggest loss in 11 months on Tuesday, plunging 524 points or 1.4%. This marked the largest single-day decline for the index since March, while the S&P 500 and Nasdaq also experienced significant losses, making it their second-worst day of 2024. The S&P 500 closed at a two-week low of about 4,950, after reaching above 5,000 for the first time ever in the previous two trading sessions.

The sharp market downturn was triggered by a worse-than-expected inflation reading for January, which dashed hopes for a swift shift in monetary policy to spur economic growth. Both headline and core inflation exceeded economists’ predictions, leading to concerns about the future trajectory of inflation and its impact on interest rates.

The bond market also reacted strongly to the inflation data, with yields for 2-year and 10-year U.S. Treasury notes surging more than 10 basis points each to their highest levels since early December. Higher bond yields indicate a loss of value for bonds, further contributing to the market sell-off.

The CBOE Volatility Index, often referred to as Wall Street’s “fear gauge,” spiked by more than 20% to its highest level since October. This increase reflects growing uncertainty and fear among investors about the future direction of the stock market.

Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance, explained, “Bonds are too expensive if inflation is still a problem and the stock market can’t keep rallying if rates are going to be higher for longer.” Market expectations for the year-end target federal funds rate have shifted, with the most likely scenario now suggesting a 100 basis points of rate cuts, significantly lower than the 175 basis points of cuts priced in just a month ago. The expected timing of the first interest rate cut has also been pushed back, with June now seen as the most likely date, compared to March in the prior estimates.

The Federal Open Market Committee’s meeting at the end of January contributed to these market shifts, as it became clear that the Fed’s monetary policy was unlikely to undergo a dramatic change. The Fed had previously forecasted 75 basis points of rate cuts in 2024 and maintained that inflation remained too high for a full policy pivot.

Despite the recent losses, the Dow, S&P, and Nasdaq are still up significantly year-to-date and have rebounded significantly from their 2022 lows. Gargi Chaudhuri, Head of American Investment Strategy at BlackRock’s iShares ETFs division, emphasized the importance of considering the improvement in the last six months, noting that the Fed primarily uses the personal consumption expenditures index, not the consumer price index, as its primary inflation barometer.