Stocks were trading on Tuesday as investors expected the Federal Reserve to apply the brakes on the economy in coming months as better-than-expected inflation data led traders to expect interest rates to remain high for an extended period. The price fell as the outlook for the price decline declined.
The benchmark S&P 500 stock index fell more than 1% in early trading. Bullish views on economic resilience and corporate profits continue to push stocks to new highs, with the index having only one day this year to experience such a large decline.
Investors still expect the Fed to bring inflation back to manageable levels without causing major pain to the broader economy. But that outlook came under pressure after Tuesday's Consumer Inflation Report showed prices rose faster than expected.
Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors, said consumer data was “stronger than the Fed or the market had hoped or anticipated.”
The longer inflation stays high, the longer the Fed is likely to hold off on cutting rates, potentially reversing the kinks in an economy already showing signs of weakness and dampening Wall Street enthusiasm. be.
Stuart Kaiser, an equity analyst at Citi, said the inflation numbers were “not a game-changer” but could cause a fall in the stock market in the short term as investors dialed back expectations for interest rate cuts. said that it was high. “Today's print was obviously not good,” he said.
Earlier this year, investors thought the Fed would likely start cutting interest rates next month following a slow but sustained decline in inflation. Investors are now abandoning bets on a rate cut in March, with Fed expectations postponed beyond the Fed's May meeting until its next meeting in June.
“A rate cut in March is completely off the table,” said Seema Shah, chief global strategist at Principal Asset Management. “However, May could still be viable if economic activity continues well and the effects of the last round of Fed tightening finally begin to show.”
Investors and analysts noted that one inflation report would not dash hopes that the economy would avoid a deep recession.
A survey of fund managers released Tuesday by Bank of America showed optimism has risen to its highest level since April 2022, shortly after the Federal Reserve began raising interest rates. Research shows investors are pouring cash into stock markets around the world, backed by the fact that allocations to U.S. stocks are at their highest since November 2021.
But some investors are concerned that the effects of the Fed's rate hikes have not yet been fully reflected in the economy, increasing the risk of a slowdown if the rate cuts are delayed.
The Russell 2000 Index, which tracks a broad range of small and medium-sized companies closely tied to the health of the nation's economy, fell about 3% on Tuesday after posting strong gains in recent trading.
If the index continues this decline until the end of the day, it will be the worst single-day performance of the year.
