Stocks plunged Wednesday as deepening concern about the economic impact of high inflation and rising interest rates drove the Dow Jones Industrial Average to its worst day since March 2020.
The Dow closed with a loss of 1,161 points, dropping 3.6 percent Wednesday for its steepest one-day drop since the onset of the coronavirus pandemic. The S&P 500 closed 4 percent lower and the Nasdaq closed 4.7 percent lower Wednesday.
Wall Street experts pinned the steep Wednesday sell-off on disappointing first-quarter earnings Target and other major retailers revealed earlier in the day, which traders saw a red flag for the economic outlook.
“The Charlie Brown shirt market continues, with big moves up and down seemingly every day,” said Ryan Detrick, chief market strategist at LPL Financial.
“Worries over inflation and a hawkish Fed are nothing new, but now add in worries over profit margins and the impact of inflation on the consumer and you have the recipe for a big down day,” Detrick added.
Target shares fell 25 percent Wednesday after the company reported earnings well below Wall Street analysts’ expectations. The retail giant blamed high gas prices, soaring transportation costs and rising employee compensation for its earnings shortfall, following similarly disappointing earnings reports from Walmart and Amazon earlier in the month.
Shares of Walmart, Amazon, Macy’s, Dollar General and Best Buy also saw steep Wednesday declines, though no sector was spared from the market’s deep sell-off.
Companies dependent on strong consumer spending such as food and beverage makers, consumer technology companies, banks, credit card companies, hotels, and airlines took heavy losses. A handful of telecommunications and pharmaceutical companies were among the few firms in the green by the closing bell.
“US stocks are crumbling after Wall Street worries about economic growth after hearing a chorus of concerns of higher prices that won’t be easing anytime soon. The strength of the consumer will be tested as both Walmart and Target signal rising pricing pressures are not easing,” wrote Edward Moya, senior market analyst at OANDA.
Wednesday marked a new low for a stock market in steady decline since the start of the year. While the U.S. economy remains strong by many measures, stock prices have fallen over concerns about the combined impact of high inflation, rising interest rates and a series of obstacles to the Federal Reserve’s fight to stabilize prices.
The Dow is now down 14 percent from the start of 2022, well below the 10 percent loss from a 52-week high that traders consider to be a correction. The S&P is down 18.3 percent on the year and the Nasdaq is deep into a bear market with 28 percent decline on the year after both indexes took heavy hits from an earlier nosedive in technology stocks.
Retailers are likely to feel more financial pressure though the rest of 2022 as the Fed boosts interest rates to curb inflation. Higher borrowing costs mean retailers will likely see fewer sales as consumers pull back spending, and companies will face the strain of rising rates on their profit margins.
Even so, some investment experts think Wednesday’s reaction to Target’s earnings miss could be overblown.
Stocks rallied Tuesday after the Census Bureau reported 0.9 percent increase in retail sales last month, showing how resilient consumer spending has been in the face of high inflation.
“The consumer still seems to be looking for ways to cut costs, shifting where they shop for things like groceries and other necessities, so they can spend on services and experiences. It’s a tradeoff,” said Lindsey Bell, chief markets and money strategist at Ally.
“However, investors will likely remain nervous about how long this consumer resiliency can last,” Bell added.
A decline in consumer demand should theoretically reduce inflation as companies are forced to keep prices stable — or even lower them — to ensure they can make as many sales as possible. But ongoing shutdowns in China, shipping delays, port bottlenecks and the economic fallout of the war in Ukraine are all likely to keep pushing prices for oil, food and other key goods higher.
Fed Chair Jerome Powell expressed confidence Wednesday the U.S. economy could handle rising interest rates without falling into a recession. But he made clear the Fed would not stop fighting inflation until it was on its way back toward the bank’s 2 percent annual target, even if it meant raising rates to levels meant to restrict the economy.
“Restoring price stability is an unconditional need — it’s something we have to do,” Powell said.
“The economy doesn’t work for workers, or for businesses, or for anybody without price stability,” he continued. “It’s the bedrock of the economy, and it’s something we need to do if we want to have the labor market we all want to have.”