It’s a question on a lot of investors’ minds: Why are stocks down today? They’re asking as the major U.S. stock market indices, including the S&P 500 and Nasdaq, post deep declines in early trading. If you’re wondering why stocks are down today, mainly it’s due to an unexpectedly high Consumer Price Index, or CPI, reading for August. This, in turn, is prompting fears of aggressively tight monetary policy from the U.S. Federal Reserve.
The S&P 500 and Nasdaq surged on Thursday, Friday and Monday as investors assumed inflation had peaked. They also expected the Federal Reserve would slow down the pace of its interest-rate hikes. Perhaps the Fed would only raise the federal funds rate by 50 basis points instead of 75 this month.
However, these assumptions may have been hasty and unfounded. Sure, gasoline prices declined from their $5-ish peak. Furthermore, home prices appear to be falling. Did all of this add up to a huge drop in the August inflation rate, though?
The Billion-Dollar Question: Why Are Stocks Down Today?
Unfortunately, inflation in August didn’t decline as much as the experts had anticipated. Year-over-year, August CPI came in at 8.3%, which is higher than the 8% economists had expected.
Apparently, even though energy prices declined 5% in August, this wasn’t enough to offset rising costs in other areas. These included increases in the costs of food, shelter, new vehicles and medical care services. Consumers might not need a new car, but they’re certainly feeling the pinch when it comes to food and rent.
Mike Loewengart, head of model portfolio construction for Morgan Stanley’s Global Investment Office, summed up the market’s disappointment with these numbers. “Today’s CPI reading is a stark reminder of the long road we have until inflation is back down to earth,” he warned. As a reminder, the Fed’s target for inflation is 2%.
Loewengart also suggested a hot inflation print means the Federal Reserve will probably have to raise interest rates higher and longer. “Wishful expectations that we are on a downward trajectory and the Fed will lay off the gas may have been a bit premature,” he explained.
Thus, the S&P 500 and Nasdaq were both down 3% or more by 11:00 a.m. Eastern. It’s an unexpected shock after a mini market rally as traders see the reality of inflation that’s hitting the nation.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
