Dow Plunges 300 Points As ‘Worst-Case Scenario’ Inflation Fears Mount - Forbes

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After a forceful Monday selloff, the market is plunging again Tuesday as inflation concerns mount ahead of the monthly consumer price index report, putting massive pressure on the stocks that propelled the market to meteoric new highs last year.

Key Facts

Shortly after the market open, the Dow Jones Industrial Average fell 301 points, or 0.9%, to 34,367, while the S&P 500 fell 1.3% and the tech-heavy Nasdaq plunged 2%, pushing it about 7.5% below a late-April high.

Heading up the Nasdaq’s losses, Tesla shares are tanking nearly 6% Tuesday morning—erasing more than six months of gains—after industry data from China revealed a significant 27% decline in Tesla vehicle sales from March to April—a clear sign of trouble in the world’s biggest auto market.

On the earnings front, shares of buzzy big-data software company Palantir Technologies, which posted better-than-expected sales and income late Monday, are plummeting 9% after management said it expects sales growth will decelerate over the next four years.

Big-tech stocks plunging Tuesday include Apple (down 3%), Twitter (down 6%) and Facebook (down 2%), while Nasdaq-listed Moderna, Zoom Video and Peloton interactive are falling 7%, 6% and 4%, respectively.

Despite the market weakness, biotech firm Ginkgo Bioworks announced Tuesday that it’s raised $2.5 billion to go public, via a special purpose acquisition company, in a deal that values the 12-year-old company at more than $15 billion—100 times the company’s expected 2021 sales of $150 million.

Crucial Quote

“With China and the U.S., the world’s two largest economies, showing signs of rising inflationary pressures, investors are getting nervous,” Sophie Griffiths, a market analyst at Oanda, wrote in a Tuesday note. “The overriding fear is that pandemic stimulus combined with reopening economies will spark a sharp drive high in inflation, forcing central banks to take action, tightening policy and potentially slowing down the economic recovery.”

Key Background

Unprecedented spending by both lawmakers and the Federal Reserve to stave off a pandemic-induced market crash helped drive stocks to new highs last year, but experts are worried that extra cash and pent-up demand could cause problematic inflation—and tank markets—once the pandemic subsides. Bank of America and Morgan Stanley are among the Wall Street investment banks that have warned inflation—and not the pandemic—is now the biggest risk to stocks. After surging more than 40% last year, the Nasdaq is up just 3% this year, compared to 14% and 12% for the Dow and S&P, respectively.

Chief Critic

“Arguably, the only reason stimulus has even been possible is because there has been no inflation. If inflation comes back, all of the safeguards investors have been given . . . will [dissolve],” Thomas H. Kee Jr., the CEO of Stock Traders Daily and a portfolio manager at Equity Logic, told Marketwatch of the tech selloff, calling problematic inflation the “worst-case scenario” for stocks. “[Investors] have been given free money by the government, stimulus programs are in full effect and they don’t perceive any risk at all. That is the most dangerous thing.”

What To Watch For

The Bureau of Labor Statistics releases its consumer price index report, a monthly inflation reading, Wednesday morning. Economists are expecting a 2.3% rise in core consumer prices year over year, up from 1.6% in April. Griffiths says that “a significantly higher” reading is “likely to send tech stocks tumbling again.”