The Dow Fell 682 Points Because Inflation Fears Have Been Realized

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The three major U.S. stock indexes fell by 2% or more on data that the consumer price index soared past estimates in April. Growth stocks took a punch in the gut, but value was bruised, as well.

Stocks plunged because investors are terrified of inflation, which is now a reality.

The

Dow Jones Industrial Average

fell 681.50 points, or 1.99%, to close at 33,587.66. The

S&P 500

plunged 89.06 points, or 2.15%, to end at 4,063.04, and the

Nasdaq Composite

dropped 357.75 points, or 2.67%, to close at 13,031.68. The biggest gainer in the S&P 500 for the second day in the row was cybersecurity firm

NortonLifeLock

(ticker: NLOK), which saw shares rise 7.19% even after an analyst downgrade.

Inflation is here. The consumer price index showed an 0.8% month-over-month increase for April, far greater than estimates for a 0.2% rise. The year-over-year increase was 4.2%, the highest since 2008, according to Wells Fargo.

Inflation is making investors nervous that the Federal Reserve will raise interest rates sooner rather than later, as the Fed is looking for inflation to run at 2% for an unspecified period. Meanwhile, inflation has already run at above 3% for several months this year, according to Wells Fargo data. The Fed has recently maintained that it isn’t yet considering raising rates, but some observers think that could change.

“After today’s much hotter-than-expected inflation data, you have to wonder if the Fed will change their tune at all,” writes Ryan Detrick, chief market strategist for LPL Financial, in emailed remarks to the media. Higher interest rates likely mean higher bond yields—and treasury yields spiked Wednesday—which makes stocks less attractive relative to bonds.

Another sign investors are particularly afraid of inflation is that the stocks most vulnerable to rising yields—growth names—were hit hardest on Wednesday. The

Nasdaq 100,

an index of large-capitalization, technology-driven companies, fell 2.6%.

Tesla

(TSLA), one component of the index, fell 4.4%. The three biggest losers in the Nasdaq 100 were chip-equipment makers

Lam Research

(LRCX) and

Applied Materials,

and chip firm

Marvell Technology

(MRVL), with respective stock losses of 5.87%, 7.02%, and 6.13%.

Higher bond yields erode the value of future cash flows,harming growing tech and biotech companies, which expect the bulk of their profits in the future. Companies represented by value stocks, on the other hand, are typically mature and in their earnings prime now.

To be sure, a spike in inflation isn’t exactly positive for any stock’s valuation—and that was proven in the breadth of Wednesday’s sell-off. In fact, 28 of the Dow’s 30 component stocks fell, and 93% of S&P 500 stocks fell.

Going forward, watch the Fed’s words and actions.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com