The U.S. stock market was in a bit of freefall on Tuesday after a crucial inflation reading came in worse than expected.
The Dow Jones Industrial Average shed more than 1,200 points on Tuesday, or about 4%, with the losses accelerating as the day wore on. The tech-heavy Nasdaq plunged by more than 5%, and the S&P 500 had about 4.3% of its value erased in the hours after the consumer price index report dropped.
At close, Tuesday marked the worst day for U.S. stocks since the first few months of the pandemic in 2020.
The economic uncertainty is also captured by the Chicago Board Options Exchange Volatility Index, better known as the VIX but also as the “fear index.” The index was up more than 15% on Tuesday alone, an enormous jump that illustrates the anxiety investors have about inflation and the potential for a recession. It is up 61% since the start of the year.
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Several tech stocks got crushed on Tuesday. Netflix was down more than 7%, and Meta, the parent company of Facebook, shed more than 9% of its value. Apple declined by 6% as investors sold their holdings.
Traditional stocks were not the only assets getting hammered on Tuesday. Cryptocurrencies were also feeling the burn from market uncertainty.
Bitcoin, which has suffered in recent months, tumbled below $21,000 around Tuesday afternoon, a nearly 10% decrease from the day before. The value of the flagship cryptocurrency is now down more than 70% from its peak of $69,000 notched last November.
All of the top 25 cryptocurrencies by market cap size were trending downward on Wednesday, except for cryptocurrencies designed to be tethered to the price of the U.S. dollar, according to CoinMarketCap.
Ethereum was down more than 7%, Ripple was off more than 5%, and Cardano plunged by nearly 7%.
Tuesday’s crash came as a direct result of the CPI reading. Inflation fell slightly to 8.3% for the 12 months ending in August, but that number was higher than economists had predicted. On a monthly basis, prices increased by 0.1%, while the consensus was that they would decrease.
The reason why investors are panicking so much is not necessarily that inflation is still stubbornly high but that the Fed will have to hit the economy even harder in order to crush higher prices. When the central bank raises rates, it increases the risk of recession, so if the Fed has to raise rates even more, it means a recession is more likely.
The Fed has raised rates twice by 75 basis points so far this year. The first hike marked the most aggressive increase since 1994, but now, some are betting that the bank could become even more forceful in its tightening.
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Investors now see a 66% chance of a 75-basis-point hike and a 34% chance that the Fed, led by Chairman Jerome Powell, will go even further and raise rates by a whole percentage point at once, according to CME Group’s FedWatch tool, which calculates the probability using Fed fund futures contract prices.
“The CPI report was an unequivocal negative for equity markets. The hotter than expected report means we will get continued pressure from Fed policy via rate hikes,” said Matt Peron, director of research at Janus Henderson Investors. “It also pushes back any ‘Fed pivot’ that the markets were hopeful for in the near term.”
