Why did US stock markets just suffer their worst day in 2 years?

Worse than expected inflation numbers released by the Federal Reserve yesterday has sent US stock markets into freefall. Investors are pumping the brakes on the prices of shares, bonds, most commodities and cryptocurrencies, as reported by the Associated Press (AP).

The inflation rate has reportedly slowed down, but not fast enough to meet experts’ expectations. It finished at 8.3% in August and was expected to lower to 8.1% for the month. Inflation peaked for the year at 9.1% in June.

Prices of food, accommodation and medical care were said to push inflation higher, with the cost of goods overall rising 0.1% higher than in July, as reported by The Guardian. This was partially offset by a dip in energy prices such as petrol. A gallon is trading for $3.71 compared with June’s high of $5.

Overall, inflation is the highest the US has seen for decades. This has prompted fears the Fed will continue to pursue its aggressive interest rate hikes when it meets next week. Interest rates are expected to increase by an additional 75 basis points, the same increase seen when the Fed increased rates in July.

More concerning is that it’s becoming less likely that the Fed will be able to get a grip on inflation while not pushing the economy into a recession at the same time. Fed Chair Jerome Powell stated that it will use its monetary tools “forcefully” to get inflation under control.

How the markets responded

The S&P 500 Index (SP: .INX), Nasdaq Composite (NASDAQ: .IXIC), and the Dow Jones Industrial Average Index (DJX: .DJI) have made new lows since July. The AP also notes that the Dow experienced the steepest sell-off in the last two years. All but six stocks in the S&P 500 fell in US trading today.

The S&P 500 Index fell 4.32% to 3,932, while the Nasdaq slumped by 3.53% to 11,633. The Dow fell by 3.94% to 31,104.

Foreshadowing further volatility in the days ahead, the Chicago Board Options Exchange’s Cboe Volatility Index (VIX) surged 14.24% to 27.27, making a new high for the month.

Bitcoin (CRYPTO: BTC) also took a hit, losing 7.89%, which broke the AU$30,000 support zone it has held since July.

All of the sector indices of the S&P 500 are in the red, including defensive sectors such as healthcare and consumer staples. The worst-hit indices included the S&P 500 Information Technology Index, which lost 5.35% and the S&P 500 Consumer Discretionary Index, down 5.22%.

And finally, while the prices of riskier assets cratered, the yields of US treasury notes, the safest of all investments, soared to 3.784%. This is the highest yield since 2007.

The post Why did US stock markets just suffer their worst day in 2 years? appeared first on The Motley Fool Australia.

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Motley Fool contributor Matthew Farley has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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