Dow Jones Industrial Average sees worst one-day drop since March 2023 on hotter-than-expected inflation 

On Tuesday, Wall Street's major indices saw large declines following a consumer inflation report that exceeded expectations, dampening hopes for near-term interest rate reductions and propelling U.S. Treasury yields upward. 

The Dow Jones Industrial Average faced its largest one-day percentage fall in almost 11 months, triggered by a Labor Department announcement that U.S. consumer prices in January rose more than anticipated, largely due to a sharp increase in shelter costs.  

Price growth in the U.S. dropped to an annual rate of 3.1% in January — above economists’ expectations of 2.9%. In December, the consumer price index (CPI) stood at 3.4%. 

Terry Sandven, chief equity strategist at U.S. Bank Wealth Management, commented on the dynamics to Reuters: 

"Equities are in retreat mode following a still inflationary CPI report. The higher for longer inflation is a setback for the Federal Reserve”. 

A team at Washington-based Monetary Policy Analytics research service that includes former Fed governor Larry Meyer called the January CPI report “ugly” and “very strong” in the “exact wrong way.” Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions, told MarketWatch the fact that core inflation remains elevated is “disconcerting.” 

Investor optimism earlier in the year, fueled by expectations that the Federal Reserve might begin cutting interest rates in May, had propelled markets to notable highs. The S&P 500 index passed the 5,000 mark for the first time last Friday, the Dow was trading near a record peak, and the Nasdaq momentarily exceeded its record close from November 2021 on Monday. 

However, following the inflation report, trader expectations for a May interest rate cut of at least 25 basis points fell to 36.1% from nearly 58% prior to the data release, with June expectations at 74.3%, according to the CME FedWatch tool. 

Megacap stocks fall, Treasury bond yields rise 

Highly sensitive to interest rates, major tech stocks such as Microsoft, Alphabet, Amazon, and Meta Platforms saw declines ranging from 1.6% to 2.2%, while U.S. Treasury note yields reached two-month highs across all maturities. 

The semiconductor sector also took a hit, with major companies like Micron Technology, Qualcomm, and Broadcom seeing their stock price drop — which led to a 2% decrease in the Philadelphia SE Semiconductor index. 

The real estate, consumer discretionary, and utilities sectors were the most affected among the S&P 500's 11 major sectors, with real estate hitting a more than two-month low. The Russell 2000 index, representing small-cap stocks, fell by 4.3%, marking its largest one-day decrease since June 16, 2022. 

Bob Elliott, chief investment officer at Unlimited Funds, told the Reuters news agency that the hotter-than-expected CPI is largely reaffirming Federal Reserve rhetoric on premature rate cuts: 

"Many Federal Reserve governors have come out in the last couple of weeks and given various indications that the cuts expected by the market in the first half of the year may have been premature. Now the CPI data are certainly reaffirming that picture”. 

This inflation update follows a minor revision of last quarter's inflation figures in 2023, which had initially offered some reassurance to investors about inflation trends. 

The Cboe Volatility Index, an indicator of market fear, reached its highest point since November. 

Dow drops by over 500 points, worst day in close to 11 months 

The S&P 500 dropped 68.14 points, or 1.37%, closing at 4,953.70, while the Nasdaq Composite fell by 282.64 points, or 1.79%, to 15,659.91. The Dow Jones Industrial Average declined by 522.05 points, or 1.36%, ending at 38,275.33, marking its most significant one-day percentage loss since March 22, 2023. 

In individual stock movements, JetBlue Airways surged 21.6% after activist investor Carl Icahn disclosed a 9.91% stake, citing the airline's stock as "undervalued."  

Meanwhile, Arista Networks shares dropped 5.5% following the cloud solutions provider's forecast of lower-than-expected current-quarter adjusted gross margin. Marriott International also experienced a decline after predicting annual profits below market expectations.