Panicky investors continued to dump stocks today as intense concerns about inflation and interest rates weighed on the markets. Selling was led by tech stocks, though the broader S&P 500 was far from immune from the onslaught.
With the losses, the tech-focused VGT and QQQ are down close to 25% from their January highs, while SPY is down by 16%. A decline of 20% or more in the market is considered the start of a bear market by many investors.
Wednesday’s release of consumer price data for April may play a big role in determining whether the decline in the S&P 500 turns into something worse. Economists expect that growth in the headline CPI decelerated from 8.5% year over year in March to 8.1% in April. The core CPI, which strips out food and energy prices, is expected to cool down from 6.5% to 6%.
If the numbers come out as expected or better, it may help support the narrative that inflation has peaked, giving at least some relief to investors. Even if that’s the case, inflation has a long way to go before it gets back to the Fed’s 2% target.
The Nasdaq-100 Volatility Index today touched its highest level since October 2020, underscoring how panicked investors are about elevated inflation and surging interest rates.
Last week’s Fed meeting in which the central bank lifted interest rates an expected 50 basis points did little to soothe investors who worry that the central bank may be behind the curve in its fight against inflation.
The 10-year Treasury bond yield today briefly topped 3.2% for the first time since November 2018.
High interest rates make bonds more appealing relative to stocks—particularly high growth and high valuation stocks—like those in the technology sector.
Stocks in sectors where growth is slower and where profits are abundant today relative to the future are seen as more insulated from higher rates. The Consumer Staples Select Sector SPDR Fund (XLP) is up 0.5% this year, while the Utilities Select Sector SPDR Fund (XLU) is higher by 0.8%.
Both sectors are seen as safe havens against an economic downturn as well.
The top-performing sector this year is energy, with a 40% gain for the Energy Select Sector SPDR Fund (XLE). While not typically considered a safe haven like consumer staples and utilities, in an inflationary environment, energy tends to do well. Add geopolitical factors into the mix and you have a recipe for strong performance in XLE and other energy ETFs.
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