Dow, Nasdaq slide on fears of prolonged inflation

Wall Street gyrated before turning lower on Thursday as worries that inflation, while it might have peaked, will remain at elevated levels and could provoke increasingly aggressive policy tightening from the Federal Reserve.

The Dow plunged more than 500 points in late afternoon trading as all three major stock indexes seesawed before settling into a steep sell-off. The S&P 500 was within striking distance of the closing level that would confirm it entered a bear market after reaching its all-time high on Jan. 3.

“At the end of the day, investor sentiment is not easy to gauge,” said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana. “Recent bear markets have been bloody but brief.”

“But when you factor in inflation there’s a possibility that a bear market will last longer than four or five months.”

Market leading megacap names, which thrived amid the low interest environment of the pandemic era, were the biggest drag, with Apple and Microsoft weighing the heaviest.

Market participants were digesting economic data, most recently the producer prices report released before Thursday’s opening bell, which appear to suggest price growth reached its zenith in March.

Even so, the Fed is still expected to hike key interest rates by at least 50 basis points at least three times in the coming months, in an effort to toss cold water on demand and rein in soaring prices. 

“It’s a market that continues to struggle to calibrate the impact, the damage being done by inflation,” Carlson added. “At the end of the day this is the first time in decades that investors have had to factor inflation into their market calculus.”

Geopolitical tensions surrounding Russia’s war on Ukraine were dialed up by Finland’s announcement that it would apply for NATO membership, with Sweden expected to follow suit, a move which prompted vows of retaliation from the Kremlin. 

The conflict, dubbed by Russian President Vladimir Putin as a “special military operation,” has further fanned the flames of inflation by pressuring global energy and grain supplies.

The Dow Jones Industrial Average fell 494.11 points, or 1.55%, to 31,340, the S&P 500 lost 63.06 points, or 1.60%, to 3,872.12 and the Nasdaq Composite dropped 201.53 points, or 1.77%, to 11,162.71.

Among the 11 major sectors of the S&P 500, tech shares were suffering the biggest percentage loss.

Earnings season is nearing the final stretch, and according to the most recent data, 79% of the S&P 500 companies who have posted results delivered better-than-expected earnings, according to Refinitiv.

Analysts now see aggregate first-quarter S&P 500 earnings growth of 11%, up from 6.4% at quarter-end, per Refinitiv.

Shares of luxury accessories company Tapestry jumped 14.2% after expressing confidence in a rebound in Chinese demand once COVID restrictions are lifted.

Walt Disney dipped 2.8% following the media company’s disappointing quarterly report.