Stocks tumble again as investors weigh Federal Reserve decision and inflation

Stocks resumed their slide in early trading Tuesday, pushing financial markets further toward a “correction” — a drop of 10% of more from their most recent high — following Monday’s reprieve when shares rallied late in the day. 

The Dow Jones Industrial Average fell 667 points, or 1.9%, shortly after the market opened, while the broader S&P 500 slumped 2.4%. The tech-heavy Nasdaq lost 2.7% in early trading on Tuesday. 

Prior to Tuesday’s slump, the S&P 500 had already lost 8% of its value this year, placing it just shy of a correction. But the tech-heavy Nasdaq Composite had declined more than 12% this year and about 14% from its November peak, placing it squarely in that category. 

Markets whipsawed on Monday, with the Dow dropping more than 1,100 points before recovering to close in positive territory and the S&P 500 and Nasdaq also swinging wildly from heavy losses earlier in the session to modest gains by the close.

Market volatility has flared this month as investors weigh how aggressively the Federal Reserve, which is holding a policy meeting this week, may raise interest rates to combat rising inflation. Consumer prices soared 7% in 2021, the biggest increase in nearly 40 years.

Historically, stocks have tended to fall sharply when core inflation, which excludes volatile food and energy prices, hits 5.5%, according to UBS analysts. In 2021, core inflation as measured by the Consumer Price Index rose 5.5% from the previous year.

The surge in Omicron variant cases may further ffuel inflation and add to supply chain woes, crimping economic growth and corporate earnings, Goldman Sachs analysts warned in a recent research note, adding that wages may also rise faster than expected.

The upshot is that the Fed “is likely to be looking at a hot inflation dashboard at its next few meetings,” the analysts said. That increases the chances that the central bank will “take some tightening action at every meeting until the inflation picture changes,” and may increase interest rates more than four times in 2022. 

Many Wall Street analysts expect the Fed to signal that it plans to start raising rates in March when policymakers issue its policy statement on Wednesday. 

Ukraine tensions

Investors are also monitoring tensions between Russia and the West over fears that Moscow is planning to invade Ukraine, with NATO outlining potential troop and ship deployments.

The Pentagon ordered 8,500 troops on higher alert to potentially deploy to Europe as part of a NATO “response force” to a military move on Ukraine. President Joe Biden has consulted with key European leaders, underscoring U.S. solidarity with allies there.

Along with monetary policy and geopolitical risks, markets are focusing on corporate earnings as reporting season kicks off. General Electric shares slumped 4.7% in premarket trading after reporting a fourth-quarter loss of $3.8 billion. Investors are watching for signs of slowing demand as the Omicron variant impacts business and consumers.

“In economic news, business activity in the U.S. decelerated this month to its slowest pace in 18 months, according to IHS Markit data,” said Craig W. Johnson of Piper Sandler in a research note.

—With reporting by the Associated Press.