If you’re worried about your portfolio, you may want to hold off checking it when markets first open.
For the past two days, markets had rocky starts sliding more than 1%. But around noon the tides started to turn and carry through the rest of the day.
The Dow Jones Industrial Average, which was down almost 2% earlier in the day, closed down 0.5% lower. The index is down nearly 17% from its January peak. Similarly, the S&P 500 closed down 0.3% and the Nasdaq Composite ended the day 0.1% higher.
This volatility comes after the Consumer Price Index soared to 9.1% in June, a much hotter than expected reading.
“The message from yesterday’s CPI inflation report is clear: inflation is broad-based, much too high, and likely to remain well-above target until Fed policy rates move into restrictive territory,” Citibank economists said in a note to clients on Thursday,
What will the Fed do?
Now, investors are bracing for a steep rate hike later this month.
Christopher Waller, a member of the Federal Reserve’s Board of Governors, said Thursday that he would be open to supporting such a move if upcoming economic data points to robust consumer spending.
Some analysts predict the Fed will follow in the footsteps of the Bank of Canada and interest raise rates by 100 basis points or 1%. That would be the largest rate hike since the 1980s. Citibank economists said they see it as “the most likely outcome.”
But a vast majority of analysts believe that the Fed will raise rates by another 75 basis points when they meet in two weeks.
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Generally, rate hikes negatively affect stocks in the near term because it makes it more expensive for investors to get financing which leaves them with less money to invest. But over time stocks historically perform well after the Fed hikes interest rates.
But the rate hikes could push the economy closer to a recession, many economists fear.
After Wednesday’s CPI report, analysts at Bank of America lowered their year-end target for the S&P 500 to 3600 from 4500, a 25% decline. That’s still below the 31% average decline during recessions.
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The yield on the 10-year Treasury, which affects mortgage rates, rose to 2.97%. It remains lower than the two-year Treasury, which is at 3.14%. That’s a relatively rare occurrence, and some investors see it as an ominous signal of a potential recession.
In addition to CPI, inflation at the wholesale level climbed 11.3% in June compared with a year earlier.
Banks had some of the biggest losses and weighed heavily on the market. JPMorgan Chase fell 3.5% after reporting a sharp drop in earnings for its latest quarter, falling short of forecasts. CEO Jamie Dimon stuck by his warning earlier this summer that a “hurricane” may be headed for the economy.
Investors are will get a clearer picture in the coming weeks of how badly inflation is hurting companies. Several more banks are on deck to report earnings Friday, including Citigroup and Wells Fargo, along with insurer UnitedHealth Group.
The Associated Press contributed
Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here