U.S. Stocks suffer largest weekly drop in three months

Stocks fell sharply as inflation fears intensified and short-term bond yields reached levels last seen in 2007.

Stocks fell sharply as inflation fears intensified and short-term bond yields reached levels last seen in 2007. The S&P 500 Index recorded its largest weekly drop since mid-June and hit its lowest point on an intraday basis since mid-July.

Growth and innovation stocks were the worst performers, with the technology-heavy Nasdaq Composite falling nearly 5.5%.

Communication services and information technology shares led the declines within the S&P 500 as Google parent Alphabet and Meta Platforms hit new 52-week lows.

It has been noted the selling was relatively orderly, trading volumes were contained, with the number of shares traded coming in below average for the year on Tuesday, when the S&P 500 suffered its worst drop in two years.

Peak inflation in question

The defining event of the week appeared to be Tuesday’s consumer price index (CPI) report, which came in above expectations and dimmed hopes for some investors that the economy had moved beyond “peak inflation.” Headline prices rose 8.3% for the 12 months ended in August. More concerning may have been that core inflation (excluding food and energy) jumped to 6.3%—its highest level since March and above expectations for a rise of 6.1%. A 0.7% housing cost increase in August was partly to blame, but rising food and medical care prices also contributed heavily.

What about Europe ?

Shares in Europe pulled back amid signs of a deepening economic slowdown. The European STOXX Europe 600 Index ended 2.89% lower. Germany’s DAX Index slid 2.65%, and France’s CAC 40 Index lost 2.17%.

The British pound depreciated against the U.S. dollar, sinking to levels last hit in 1985. Fears of a looming recession contributed to this downward pressure, along with concerns that the Bank of England might deliver an interest rate hike of 0.5 percentage point at its next meeting, a smaller increase than the U.S. Federal Reserve is expected to announce.

So, what now ?

The latest inflation report sparked an abrupt repricing in the stock and bond markets to reflect a higher anticipated peak in the central banks policy rate, but the broader investment backdrop remains the same.

It is expected of the Fed to raise rates by 75 basis points (0.75%) at its meeting next week and continue with smaller rate hikes in the coming months to stamp out inflation pressures.

Investors seem to believe the June lows in the stock market largely reflected this type of policy-tightening response from the Fed, with the 20%-plus decline already pricing in a mild recession resulting from rate hikes.

Investors can use this opportunity to proactively rebalance portfolios, adding to quality investments and diversified asset-class positions, which could be rewarded as markets eventually mount a more enduring recovery.