Stocks Market Extends Decline as Inflation Worries Mount

13 May 2021 · 3rd Party Analysis

Stocks Market Extends Decline as Inflation Worries Mount


In Summary

  • S&P500 and Dow Jones suffer the biggest three-day slide in seven months
  • Higher than expected inflation data poses a threat for tech stocks in particular

Stocks Market Extends Decline as Inflation Worries Mount

US benchmark indexes had their worst day in months after consumer price data for April reinforced fears about a sharp rise in inflation. Wednesday’s inflation data release spooked investors once again as the Nasdaq Composite experienced its worst day in three months, while the S&P500 and the Dow Jones Industrial Average posted their steepest three-day declines in nearly seven months.

The sharp drop in the stock gauges came after the US government released its latest consumer price report that showed inflation rose more than 4% in April, compared to the previous year. The rise of 4.2% is the fastest pace for inflation growth since 2008.

The broad-based S&P500 declined 89.06 points, or 2.14%, to end the session at 4,063.04. The Dow Jones Industrial Average erased 681.50 points, or 1.99%, finishing Wednesday at 33.587.66. The tech-centred Nasdaq Composite slid the most percentage-wise, and closed lower by 357.75, or 2.67%, at 13,031.68.

The bigger-than-expected jump in prices, combined with a disappointing jobs report for April, painted a rather different outlook for the economy than the one investors expected. Higher inflation, on the one hand, could prompt the Federal Reserve to bring forward its timeline for unwinding the monetary support so that the economy could cool down. Interest rates near zero have been incentivizing market participants to increase their risk appetite for stocks, which resulted in record highs across the board. On the other hand, if the Federal Reserve scales back its easy-money policies, this could dampen the creation of new jobs in the market and lead to a slowdown in the economic recovery.

Record High for Dow Jones

Inflation concerns have been on the horizon for a while now but they began to rise in the last couple of months after President Biden signed off on the $2.3tn stimulus package in March. To some extent, climbing inflation is expected by both the Federal Reserve and the market. The central bank has essentially been downplaying the risk of inflation, trying to assuage investors’ fears that higher inflation could threaten the stock market growth.

Since hitting an all-time high on Friday, the S&P500 has declined over 4%. The Dow Jones also notched a record high last week and for the past three days, the blue-chip index has skittered down over 4.2%. The technology-based Nasdaq Composite is hit the heaviest, down over 5.6% for the period Monday through Wednesday. Inflation and the prospect of higher interest rates are particularly threatening to growth stocks, primarily the tech sector, which has growth expectations and high future earnings baked into its current pricing. On Wednesday, tech stocks were among the biggest decliners. Shares of Google-parent Alphabet slid 3.1%, while Tesla shares dropped 4.4%. Apple, Amazon, and Microsoft were all down by 2% or more apiece.

The surge in prices acted as a confirmation to the Federal Reserve that the economy is overheating. Americans have been paying more for everything from groceries, to cars, to real estate. In April, hotel prices, for example, increased 8.8% for the month and 8.1% on an annual basis.

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