The global stock markets experienced a sharp sell-off on Thursday, as investors worried about the rising inflation pressures and the persistent supply chain bottlenecks that threaten to derail the economic recovery from the pandemic. The Dow Jones Industrial Average fell 0.5%, the S&P 500 dropped 0.9%, and the Nasdaq Composite tumbled 1.6%, wiping out their gains for the week1. The volatility index, or VIX, surged 16% to its highest level since August2.
The main catalyst for the market turmoil was the release of the U.S. consumer price index (CPI) data, which showed that inflation rose 0.4% in September, matching the consensus estimate, but was up 5.4% year-over-year, the highest since 20083. The core CPI, which excludes food and energy, increased 0.2% month-over-month and 4% year-over-year, slightly below expectations3. The data indicated that inflation remained elevated and persistent, despite the Federal Reserve’s view that it was transitory and would ease as the economy reopened.
Another factor that weighed on the market sentiment was the ongoing supply chain crisis, which has caused shortages of goods, delays in deliveries, and higher costs for businesses and consumers. The global shipping industry has been struggling to cope with the surge in demand for goods amid the pandemic, as well as the disruptions caused by port congestion, labor shortages, and weather events4. The situation has worsened in recent weeks, as China’s power crunch forced some factories to shut down or reduce output, adding to the supply-demand imbalance5.
The market sell-off was broad-based, with all 11 sectors of the S&P 500 ending in negative territory. The worst-performing sectors were energy, technology, and consumer discretionary, which fell 2.4%, 1.7%, and 1.6%, respectively. Some of the notable losers included Tesla (-3.4%), Amazon (-2.8%), Boeing (-4.1%), and Netflix (-3.6%). On the other hand, some of the defensive sectors, such as utilities, health care, and consumer staples, outperformed the market, but still closed lower.
The market weakness was also evident in other regions, as European and Asian stocks also suffered heavy losses on Thursday. The Euro Stoxx 50 index dropped 1.7%, the FTSE 100 index declined 1.2%, and the DAX index slid 1.9%. The Asian markets were also in the red, with the Nikkei 225 index falling 0.6%, the Shanghai Composite index shedding 0.7%, and the Hang Seng index plunging 2.2%.
The market turmoil also affected other asset classes, such as commodities, currencies, and bonds. The price of oil fell for the first time in seven days, as concerns about demand outweighed the supply disruptions caused by Hurricane Ida and a strike in Norway. The price of gold also declined, as investors sought safety in the U.S. dollar, which rose against most of its peers. The yield on the 10-year U.S. Treasury note dropped to 1.54%, as bond prices rose amid the flight to quality.
The outlook for the stock market remains uncertain, as investors face a number of risks and challenges in the coming weeks and months. Some of these include:
- The Federal Reserve’s tapering decision: The Fed is expected to announce its plan to reduce its monthly bond purchases at its next meeting in November, which could signal a tighter monetary policy stance and put pressure on the stock market.
- The debt ceiling deadline: The U.S. government is running out of money to pay its bills by October 18, unless Congress raises or suspends the debt limit, which could trigger a default or a downgrade of the U.S. credit rating.
- The earnings season: The third-quarter earnings season will kick off next week, with some of the major banks reporting their results on October 14. Investors will be looking for signs of how companies are coping with inflation, supply chain issues, labor shortages, and consumer demand.
- The COVID-19 situation: The pandemic is still not over, as new variants and outbreaks pose a threat to public health and economic activity around the world. The vaccination rate and the effectiveness of vaccines will be key factors in determining how fast and how strong the recovery will be.