The blue chip Dow Jones Industrial Average headed toward one of its worst days of the year Wednesday, after the latest inflation reading failed to support investors’ most optimistic hopes for the Federal Reserve to boost valuations with interest rate cuts.
Traders work on the floor of the New York Stock Exchange last week.
The Dow fell as much as 740 points, or nearly 2%, by mid morning, touching its lowest price since Aug. 14 and pacing toward its second-worst daily loss of 2024 on point and percentage bases, trailing only the Aug. 5 mini crash which wiped out nearly 3% from the index; losses moderated to a 1.3%, or 530-point, dip by 11:30 a.m. EDT.
The plunge came as investors digested the August consumer price index inflation report, which, despite disclosing the best headline inflation number since Feb. 2021, spooked financial markets, as the arguably more important core inflation metric rose slightly more than expected month-over-month.
That caused traders to become increasingly confident the Fed would slash interest rates by 25 basis points, rather than 50, at its meeting next week – the CME FedWatch Tool’s odds of a 50 basis point cut fell from 34% to 17% on Wednesday – an unwelcome development as lower interest rates boost stock prices as cheaper borrowing costs bolster profit margins.
Losses were milder for the U.S.’ other major stock indexes, the bellwether S&P 500 (down 1.1% Wednesday) and the tech-concentrated Nasdaq (down 0.6%).Accounting for the gap is the 30-company’s Dow outsized exposure to more rate-sensitive stocks like health insurance provider UnitedHealth and property insurer Travelers, both of which fell about 3%.
“The market is pricing in more rate cuts than what will occur this year,” BlackRock strategist Gargi Chaudhuri wrote in emailed comments ahead of Wednesday’s market open, foreshadowing the looming losses.
Among the hardest-hit stocks Wednesday were those involved in the so-called “Trump trade,” equities whose prices have correlated in recent months with President Donald Trump’s betting odds in the November election. Energy and financials, industries which Trump has vowed to deregulate, were the S&P’s worst-performing sectors Wednesday as Trump’s odds fell following his debate with Vice President Kamala Harris.
The selloff escalated the stock market’s September woes, with the S&P down about 4% in the month which is historically weak for equity returns. Still, equity returns have been robust in 2024, with the S&P up more than 15% year-to-date, above the historic average.