Panic that inflation is cutting deep into corporate profits sparked a wave of Wall Street selling on Wednesday. With consumer stocks leading the retreat, the Dow Jones Industrial Average tumbled almost 1,200 points, marking the ninth largest single-day point drop in history.
Meanwhile, the S&P 500 and Nasdaq Composite each shed more than 4%. The sell-off came as investors dumped consumer names following disappointing earnings numbers from Target.
The Dow finished -3.6%, the S&P 500 closed -4.0% and the Nasdaq ended -4.7%.
The Dow Jones posted a decline of 1,164.52 points, ending the day at 31,490.07. The S&P 500 dropped 165.17 points to close at 3,923.68. The Nasdaq sank 566.37 to conclude trading at 11,418.15.
All 11 of the S&P sectors finished deep in the red. With the retail sell off, Consumer Discretionary and Consumer Staples both plunged more than 6%. There was also heavy selling in Info Tech and Industrials.
Target plunged about 25% after announcing results that echoed the margin problems Walmart reported earlier in the week. The downbeat results had reverberations throughout the sector, including an outsized impact on mall stocks.
In the bond market, U.S. Treasury yields fell across the board. The 10-year Treasury yield declined 8 basis points at 2.90%, while the 2-year shed two basis points to hit 2.68%.
On the economic front, April housing starts fell more than expected, while building permits also dropped.
"Starts and permits are likely to fall sharply over the next few months, tracking the downshift in new home sales, which in turn follows the ongoing rollover in mortgage applications," Pantheon Macro's Ian Shepherdson said. "Demand likely has not yet hit bottomed, allowing for the usual lag between increases in rates and the response from potential homebuyers, so we think sales and starts could easily fall through the end of the summer."
"Housing punches above its weight in driving opinions about the state of the broad economy, so the rollover we expect to see is a key part of our story that the Fed will switch from 50bp hikes to 25bp in July or September."
Retail and housing stumbles are adding to speculation of a recession, which is now the base case for Wells Fargo. But MKM is skeptical.
MKM's Michael Darda pointed out in a note that the National Bureau of Economic Research, the official arbiter of U.S. business cycles, defines a recession "as a period of declining production, sales, income and employment usually lasting more than a few months. There is nothing in the data (so far) that would come close to meeting this definition. The common refrain that a recession is 'two negative quarters of GDP growth' is a widely held but errant assumption."
Darda added: "Moreover, the nearly universal assumption propounded on financial TV, a holdover from the previous cycle, that every stock market correction is a 'growth scare' is belied by the behavior of credit markets which have tightened very little relative to the decline in equity prices or the ongoing upward sloping nature of yield curves that actually predict recessions."
Bucking the trend in retail and the overall market, TJX was among the biggest S&P gainers after its results.