By Damian J. Troise and Alex Veiga
Banks and energy companies led a broad pullback for stocks Tuesday, knocking the Dow Jones Industrial Average more than 470 points lower and wiping out the market's gains from last week.
The S&P 500 lost 0.9%. That, plus its losses Monday, outweigh the benchmark index’s gains last week. The Dow sank 1.4%, its worst day since Feb. 26. Treasury yields mostly edged higher.
The market's downturn so far this week reflects growing worries among investors that inflation is rising. Any significant acceleration of inflation would be a drag on the overall market and could crimp the broader economic recovery. The selling comes ahead of a key measure of inflation at the consumer level due to be released by the government Wednesday.
Commodity prices have been rising, particularly for industrial metals such as copper and platinum, as well as for energy commodities like gasoline and crude oil. Tech stocks, which get most of their valuation from the future profits those companies are expected to earn, become less valuable if inflation decreases the value of those earnings.
Big technology companies were among the biggest decliners for a second straight day. Still, financial and energy companies, the best-performing sectors of the S&P 500 so far this year, fell the most. These sectors, in addition to industrials, have been favorites of investors betting that the economy will continue to recover from the pandemic. It's not uncommon for the stocks that have notched the biggest gains over time to fall sharply when investors turn cautious.
“Yesterday, people were just watching to see what’s causing the market to move downward," said Sam Stovall, chief investment strategist at CFRA. “Today the question is, ‘gee, maybe this could be more than I was expecting it to be,’ so investors are saying ‘let me take profits while I can.'”
The S&P 500 index lost 36.33 points to 4,152.19. The Dow fell 473.66 points to 34,269.16. The blue chip index hit an all-time high on Friday for the third straight day. The Nasdaq lost 12.43 points, or 0.1%, to 13,389.43.
Small company stocks also gave up some ground. The Russell 2000 index fell 5.71 points, or 0.3%, to 2,206.99.
Inflation has been a concern for investors since bond yields spiked earlier this year, though yields have mostly stabilized since then. The yield on the 10-year Treasury was steady at 1.61%. Despite reassurances from the Federal Reserve and a much weaker-than-expected U.S. jobs reading last week, investors have refocused on the potential for surging prices to pressure central banks into tapering off on their massive stimulus and ultra-low interest rates, analysts said.
The market is going through a period of “digestion” as the economy recovers and is due for some consolidation following a strong run, said Sunitha Thomas, national portfolio advisor at Northern Trust Wealth Management. Rising inflation isn't unusual given the strong economic recovery along with a surge in company earnings, she said.
Rising inflation in commodities has begun to push prices for some consumer products higher. Still, analysts expect increases to be mild and tied to the growing economy, even as the jobs market lags behind. Consumer confidence and retail sales are regaining ground as people get vaccinated and businesses reopen.
Signals of inflation have popped up in other markets. China reported its strongest increase in producer prices since October 2017 last month, as supply constraints cascaded into manufacturing.
Meanwhile, the most recent round of corporate earnings reports showed a broad recovery touching many different sectors and industries during the first three months of the year. Much of that was anticipated ahead of the reports and investors are now far off from the next big round of results.
Updated on May 11, 2021, at 5:18 p.m. ET.