Stocks sink as inflation, recession fears rattle Wall Street

Stocks fell Tuesday as a steep decline in technology stocks deepened Wall Street’s losses after a brutal start to 2022.

The Dow Jones Industrial Average closed with a loss of 809 points Tuesday, falling 2.4 percent. The Nasdaq composite closed with a loss of 4 percent and the S&P 500 index fell 2.8 percent by the closing bell

Following a year of stellar gains, all three indexes have fallen since the start of the year as investors brace for the continued war in Ukraine, high inflation and the Federal Reserve’s attempts to cool off price growth to cut into corporate profits. Tech stocks that made up much of the market’s massive gains last year are among the leading forces behind the steady decline across Wall Street.

The tech-heavy Nasdaq is down more than 21 percent on the year, falling into a bear market as shares of Apple, Meta, Alphabet, Netflix and Tesla plunge from record highs. All posted significant losses Tuesday, with a 10 percent drop in Tesla stock leading the index downward.

The S&P is down 13 percent on the year, beyond what investors consider a correction, and the Dow is down 9.1 percent since the start of 2022.

All three indexes have closed out the past three weeks with losses, reversing a brief comeback derailed by concerns about growing threats to business revenue.

Both the war in Ukraine and COVID-19 lockdowns in China have boosted pressure on prices for food, energy, shipping and manufactured goods after more than a year of high inflation across the globe. Deeper supply chain issues pose a major obstacle to the Fed as it attempts to raise interest rates fast enough to reverse inflation but slow enough to keep the strong U.S. economy growing and adding jobs.

Higher interest rates raise borrowing costs for consumers and businesses, which can hinder business investment and shrink corporate profit margins. Stocks often fall as the Fed is raising interest rates, particularly when investors fear the bank may need to hike quicker than they currently anticipate or higher than investors had expected.

“The Fed is raising rates to get inflation under control. This is painful in the short term, but necessary to lay the foundation for future growth. As always, we just need to ride out the short-term pain to benefit from that future growth,” wrote Brad McMillan, chief investment officer for Commonwealth Financial Network, in a Monday research note.

Some economists and investment experts have become increasingly worried about the U.S. economy falling into a recession this or next year as the Fed fights inflation amid several global obstacles. While there is no one universal definition of a recession, some banks and economists expected three to six months of negative economic growth within the next 12 to 18 months.

“We regard it … as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel,” Deutsche Bank economists wrote in a report to clients Tuesday, CNN reported.

Other experts believe recession fears are overhyped given the strength of the U.S. economy and the likelihood that inflation has peaked in the U.S. The U.S. added 1.7 million jobs over the first three months of 2022, and consumer spending has been resilient in the face of high price growth, thanks in part to rapid wage growth in low-income fields.

“In spite of these risks, the metrics above suggest that the economy could escape a recession in the near term, with potential for nearly 3% growth this year,” wrote Jeffrey Roach and Lawrence Gillum of investment firm LPL Financial, in a Monday research note.

“On balance, we think the economy is steady enough to handle the current tightening cycle even if the Fed is coming late with its hawkish tones,” they added.

Updated at 4:41 p.m.