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Stocks Reverse Course, Finish Lower on Inflation Data

Stocks Reverse Course, Finish Lower on Inflation Data

Stocks slumped Wednesday after fresh data showed that inflation–although easing–remained higher than had been expected last month, feeding renewed anxiety about the Federal Reserve’s likely response.

The S&P 500 declined 1.65%, sitting near its low of the day at 4 pm ET. The move summarized a rough stretch for the index after it had snapped a three-day losing streak Tuesday, showing sustained pressure on stocks as investors brace for the Fed to remove more of its economic support.

The Dow Jones Industrial Average fell 1%, or 327 points, while the technology-focused Nasdaq Composite was down 3.2%.

Trading was bumpy. The S&P 500 turned lower in the afternoon after spending much of the morning in the green, and its losses deepened as the closing bell neared. There is a long way to go before rising prices come back under control, investors and analysts warned, giving rise to volatility as financial conditions continue to tighten.

“The Band-Aid is still coming off slowly,” said Michael Farr, the chief executive of investment advisory Farr, Miller & Washington. “According to the Fed, we’re not near the end of this process that everyone wants over.”

The consumer-price index increased 8.3% in April from the same month to year ago, data released Wednesday morning showed, decelerating from an 8.5% annual rate in March but above the 8.1% expected by economists. Lower annual inflation last month marks the first monthly easing of price increases since August 2021.

Volatile markets have been primed to react strongly to any headline hinting at persistent price pressures, said David Kotok, chief investment officer at Cumberland Advisors. “We’re in those kinds of crazy times,” he said.

The higher-than-expected inflation numbers pushed traders toward safer securities. Investors bought government bonds, sending the yield on 10-year Treasury notes—which underpins borrowing costs throughout the economy—down to 2.918%, from 2.990% at Tuesday’s settlement. Earlier in the morning, yields had spiked before retreating as traders digested the inflation data. Yields and bond prices move in opposite directions.

Riskier assets, on the other hand, continued to suffer on Wednesday. Niche pharmaceutical companies were among the Nasdaq’s biggest losers of the day, with larger tech firms such as Netflix and Facebook parent Meta Platforms both declining as well. In the unpredictable world of cryptocurrency, bitcoin lost about 2.7% against the dollar and continued to trade more than 50% off of its all-time highs since last year.

Traders worked on the floor of the New York Stock Exchange on Tuesday.


Photos:

BRENDAN MCDERMID/REUTERS

“The bubble-type stocks will continue to unwind, and we’re watching bitcoin closely,” said Chris Senyek, chief investment strategist at Wolfe Research. Market losses in areas like those—which have attracted throngs of retail investors over the last two years—could dent spend in the real economy, he warned.

More speculative bets like investments in growth-oriented stocks and crypto have been slammed this year. Higher interest rates set by the Fed translate into greater returns on safe assets, dimming the appeal of far-off profits. The central bank last week lifted rates by half a percentage point, the biggest rise since 2000, and approved a plan to shrink its $9 trillion asset portfolio, kicking into a higher gear its campaign to rein in 40-year-high inflation.

Adding to the uncertainty for investors are the war in Ukraine, which has propelled inflation even higher by boosting commodity prices, and Covid-19 lockdowns in China that threaten to hurt the global economy.

“If we only had rising policy rates, or only had high inflation, or only had China or only had Ukraine, we could probably manage that,” said Daniel Morris, chief market strategist at BNP Paribas Asset Management. “But we’ve got all that simultaneously. That’s why it’s such a particularly challenging environment.”

Aoifinn Devitt, chief investment officer at investment advisory Moneta, said she has been guiding clients toward investments grounded in the real economy, such as in the energy and infrastructure sectors, because of those sectors’ relative strength amid inflation. The selloff among tech stocks, she noted, has been “indiscriminate.”

“It’s probably a sign of fear that has entered the retail investor complex,” Ms. Devitt said.

Riskier corners of the market got little comfort on Wednesday. Bitcoin’s recent selloff, and a downbeat quarter report Tuesday, contributed to declines for Coinbase Global. Its shares slid 26% after the cryptocurrency exchange said its users declined from the previous quarter. Shares of Unity Software plunged 37% after the videogaming software developer widened its loss and gave second-quarter revenue guidance below analysts’ expectations.

Kohl’s stock fell 5.55% as shareholders rejected an activist investor’s push to replace up to 10 directors as the retailer is exploring a potential sale. Switch rose 9.1% after the computer-services company said it was being taken private by a consortium of investors.

On the other hand, strong earnings reports from some companies drove gains. Shares of Electronic Arts rose 8% after the videogame company said revenue in the latest fiscal year rose 24% to $6.99 billion. Donut chain Krispy Kreme logged a 3.8% rise after reporting earlier Wednesday that net revenue jumped 16% year over year in the three months through March.

Oil prices climbed. Brent crude, the global benchmark, rose $5.05 a barrel, or 4.9%, to settle at $107.51 a barrel.

Overseas markets were broadly higher. The Stoxx Europe 600 gained 1.7%, led by shares of auto and real-estate companies. In Asia, Hong Kong’s Hang Seng gained 1% and the Shanghai Composite Index added 0.8%.

Write to Joe Wallace at joe.wallace@wsj.com and Matt Grossman at matt.grossman@wsj.com

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