US markets retreated on Tuesday, snapping the string of record rallies. The Dow Jones Industrial Average slid 382 points amid swelling fears of inflation data and rising yields of Treasuries. The recent exuberance of the market has given way to caution as investors now shift their attention to the Consumer Price Index report.
Key Takeaways
Dow Jones lost 382 points, closing at 43,910.98, after investor sentiment suddenly turned cautious.
The S&P 500 fell 0.29%, and the Nasdaq dropped 0.09%, both pulling back from five-session winning streaks.
Treasury yields, meanwhile, jumped as high as 4.43% and put pressure on stocks as inflation and Fed policy fears mounted.
Tesla and Trump Media fell and continued the recent retreat in some high-flying stocks.
Dow Drop: What to Know About Tuesday's Market Fall
The Dow Jones Industrial Average tumbled, snapping a recent winning streak and reflecting increasing investor caution. Losses for the materials, healthcare, and real estate sectors pulled the broader market lower. This marks the first significant pullback for the Dow since Election Day, when a roaring rally followed Donald Trump's presidential win.
Contributing factors to the decline included profit-taking ahead of the key CPI data, along with surging Treasury yields that raise red flags about the cost of borrowing.
US CPI Data: What Investors Will Be Looking For
The highly-anticipated Consumer Price Index report slated this Wednesday has been taking center stage in market discussions. According to economists, a headline CPI gain of 2.6% over last year is expected, while core CPI is seen up 3.3%.
These have become quite important in looking at the Federal Reserve's next steps. Markets currently price in a 62% chance of a 25-basis-point rate cut at the Fed's December meeting, down from 83% in last month. A higher-than-expected reading on inflation would dampen hopes for further rate cuts, pressuring equity markets further.
Sector Spotlight: Material and Healthcare Stocks fall
Materials and healthcare stocks were among the heaviest losers from Tuesday's session, driven down by higher input costs with corresponding inflationary pressures. Real estate also struggled due to dampened investor sentiment amid rising Treasury yields.
On the other hand, bucking against the trend, information technology and communication services outperformed.
Dwindling Investor Confidence with Higher Treasury Yields
The yield on the 10-year Treasury note rose to 4.43% from 4.307% on Friday. The increase has fueled concerns about inflation and economic headwinds amid recent signs that the U.S. may achieve a soft landing. That's driven yields up and reduced demand for stocks since investors can generate stronger returns in fixed-income markets with less risk.
It's a cautious day in the bond market as investors prepare for a potentially rocky day of trading after the latest CPI reading.
Tesla, Trump Media Fall as Broader Market Slides
Two of the biggest winners of late-Tesla and Trump Media-saw sharp declines on Tuesday. Tesla's stock fell 6.2% versus a 31% rise since Election Day. Trump Media, DJT, shed 9% as it showed the general concern in markets about the bubbles and investors taking profits. These declines are the indication that how high flying stocks are susceptible to sentiments that do not support their recent gains.
Market Sentiment: Fear & Greed Index Stays in Greed Zone
Still, the CNN Business Fear & Greed Index remained solidly in the "Greed" zone at 68.7. The indicator, which measures market sentiment, suggests that greed remains stronger than fear.
Still, the sustained rise in Treasury yields and inflation fears could ultimately bring sentiment back toward "Neutral" and possibly even "Fear."
Economic Data Recap: Inflation Expectations and Consumer Optimism
Economic data was mixed Tuesday:
One-year inflation expectations moderated slightly, to 2.9%, from the 3% levels set over the past four months.
The RealClearMarkets/TIPP Economic Optimism Index rose 13.4% to 53.2, its highest level in over three years.
These results complete a strange juxtaposition of increasing consumer optimism while markets prepare for what many believe will be the inevitable rattling of the inflationist dragon.
What's Next: Setting Up For Market Moves After CPI Data
Most of the cue will come from the CPI report in the coming days. A reading higher than the consensus estimate may induce the FOMC to be more measured in rate cuts, further pressuring equities downward.
Investors' focus on Thursday will be on Fed Chairman Jerome Powell's speech for further indications about the future course the central bank intends to take in its battle against inflation and interest rates.
Conclusion
This market pullback on Tuesday reflects the tenuous balance between optimism and caution amid economic uncertainties. The 382-point drop in Dow reminds the market participants of the uphill task ahead while the inflation data and policymaking course ahead by the Federal Reserve will shape the market sentiments. Though sectors like technology gained, the rising yields and fears of inflation also signal a volatile day ahead.
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