Ongoing inflation worries prompt renewed slide in Dow, S&P and Nasdaq

Stocks finished Friday’s trading with solid losses, turning back to the downside after a bout of bargain hunting the day before. The S&P and Nasdaq recorded their seventh losing session out of the past eight.

The decline came amid signs of rising inflation expectations, which raised long-term concerns about the stickiness of higher inflation. Investors also kept an eye on events in the U.K., where the fragile bond market in that country remains a potential source of financial turmoil.

The Nasdaq Composite (COMP.IND) ended 3.1%, the S&P 500 (SP500) closed -2.3% and he Dow (DJI) finished -1.3%.

The Nasdaq led the major averages lower, falling by 327.76 points to close at 10,321.39. The S&P 500 dropped 86.84 points to end at 3,583.07, while the Dow Jones retreated 403.89 points to close at 29,634.83.

All 11 S&P sectors finished the day lower. Consumer Discretionary, Energy and Materials all declined more than 3%. Health Care held up better than the other sectors, as the only segment falling less than 1%.

Wall Street experienced a rollercoaster session on Thursday, marked by an early drop to new lows of the year followed by a massive rally. Friday’s session saw sentiment turn cautious again, with the specter of inflation overcoming generally strong earnings from the financial sector.

“We had a sharp post-CPI reversal [on Thursday], indicating that a lot of buy interest materialized at the critical 3,500 support level in the S&P 500,” Seeking Alpha contributor Victor Dergunov explained.

“While the market is giving back some gains into the weekend, positive earnings could drive stocks higher into the 3,800-4,000 range in the coming weeks,” he added. However, the analyst warned that “it is not likely that the bear market is over” and projected that “we may see the market drop to new lows before 2022 comes to an end.”

Looking to the bond market, the 10-year Treasury yield (US10Y) climbed 6 basis points to 4.02% and the 2-year yield (US2Y) rose 6 basis points to 4.51%. During Friday’s trading, the yield curve inversion between the 2-year and 10-year hit another two-decade record.

In the day’s most impactful economic release, the University of Michigan announced its preliminary reading of October consumer sentiment. The headline number edged up to 59.8 but investors focused on one-year inflation expectations, which climbed to 5.1% from the prior reading of 4.7%.

Economists generally expected this number to tick lower, assuming that the Federal Reserve’s aggressive interest rate increases would convince consumers that authorities would get inflation under control. However, the surprise increase in the one-year expectation suggested deepening concern among the public about price increases — a fact that could lead them to demand even higher wages and to shift their purchasing behavior even more than they already have.

“The uptick in inflation expectations probably is a response to the increase in gas prices in recent weeks, in which case it won’t continue,” Pantheon Macro’s Ian Shepherdson said. “Moreover, this is a preliminary reading and could be revised by as much as +/-0.2pp, if recent experience is any guide.”

Shepherdson added: “Still, on the heels of the September inflation data this rebound – reversing the drop last month – does not look good, given how closely policymakers appear to track the measure.”

In the U.K., recent volatility in the country’s government debt, known as gilts, sparked a high-profile shakeup in the government. Prime Minister Liz Truss replaced Kwasi Kwarteng as Chancellor of the Exchequer with former Foreign Secretary Jeremy Hunt.

In other economic news released early Friday, September retail sales came in below expectations. The figure was flat with the previous month, compared to a 0.2% increase projected by economists. Core sales, which exclude auto sales, climbed 0.3%. However, this was also short forecasts, which called for a rise of 0.4%.

Next week will see a rush of corporate results as the quarterly earnings season hits its stride. The process began on Friday with a host of big-name banks announcing their financial figures. The results were relatively positive, with JPMorgan, Wells Fargo and Citi all notching gains in the wake of their quarterly reports.

However, Morgan Stanley bucked the overall trend, losing ground after disclosing a soft revenue figure. The financial giant also suggested that it could be eyeing job cuts.

Next week, the ongoing flow of earnings will provide a key catalyst. This includes reports due out from Tesla, Netflix and Johnson & Johnson.

Among active stocks Tesla and much of the rest of EV space lost ground ahead of earnings data next week. Meanwhile, Nutanix rallied on a report that it is looking into a possible sale.

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