Inflation worries knock stocks lower again; bond yields rise

In this Nov. 23, 2020 file photo, the New York Stock Exchange is seen in New York. Stocks are opening lower, Wednesday, May 12, 2021, on Wall Street and bond yields are rising as investors reacted to a worse-than-expected increase in inflation last month. (AP Photo/Seth Wenig)

A surprisingly big jump in inflation last month knocked the stock market lower again Wednesday as investors worry that the economy may bounce back too fast from its pandemic-induced doldrums.

Tech giants, which had soared during the past year of lockdowns, took some of the biggest losses. The S&P 500 is flirting with its worst weekly drop since October.

Bond yields snapped higher after the government reported that consumer prices rose 0.8% in April, more than expected, and prices rose year-over-year at the fastest rate since 2008.

The yield on the 10-year Treasury note rose to 1.69% from 1.62% a day earlier, a big move. Bond yields rise when investors fear that an increase in inflation will erode the future value of the income that bonds pay.

Inflation concerns have been hitting the stock market hard this week. The S&P 500 was down 1.7% in afternoon trading, extending its weekly drop to 3.6%. The tech-heavy Nasdaq was off 2.3%, and it's now down 4.9% so far this week.

The Dow Jones Industrial Average gave up 471 points, or 1.4%, to 33,794 as of 2:01 p.m. Eastern. The Dow and the S&P 500 reached their latest record highs last Friday.

Investors have been worrying that inflation could return after being absent for many years as the economy revs out of the recession brought on by the pandemic. Federal Reserve officials and other economists have said moderate inflation may actually be a good thing in a recovery.

While the latest reading on inflation was hotter than expected, the market shouldn’t be too surprised about inflation rising, said Jeff Buchbinder, equity strategist at LPL Financial. The prevailing sentiment is that rising inflation will be temporary, though “it's too early to say whether these higher levels are going to be sustained,” he said.

Inflation concerns helped send bond yields spiking earlier this year, though yields have mostly stabilized since then. Major banks were doing better than most of the market as yields rose, which allow them to charge more lucrative interest on loans. Wells Fargo rose 1.4% and Citigroup added 0.4%.

Concerns about rising inflation also raise the question of whether the Federal Reserve will change its posture on maintaining low interest rates as the economy recovers. Buchbinder said investors shouldn't expect that to happen any time soon, however, given that the economy, and particularly the job market, are still a long way from being fully recovered.

“Really the Fed has one mandate right now, which is to regain full employment, and it's going to take some time," Buchbinder said.

Analysts expect consumer prices to rise as the economy recovers, but higher prices could run the risk of curtailing some spending, which the economy needs to sustain its recovery. The cost of new cars rose 0.5% in April, the largest increase since last July, because of heavy demand and a computer chip shortage that has slowed production and reduced dealer supplies.

Rising inflation makes stocks seem more expensive, particularly high-value tech stocks that trade on the potential for their future profits in coming years. Apple, Microsoft, Facebook and Amazon were all down nearly 2% or more.

Energy prices continued to climb following the shutdown of a major gas pipeline on the East Coast earlier in the week, and there are now reports of gasoline hoarding happening in places like North Carolina. The price of U.S. crude oil rose 1.6% and wholesale gasoline rose 1.3%. The higher prices are helping energy companies make gains as the rest of the market slips. Exxon Mobil rose 1.7% and Chevron rose 1.6%