The S&P 500 just had its worst day since June 2020 – here’s why

Wall Street has effectively given back the week’s gains after US inflation figures remain stubbornly high.

Yesterday’s optimism was quickly forgotten with the US markets having their steepest sell-off in 2 years, following the latest inflation figures.

Investors were optimistic the worst could be over.

Instead, the S&P 500 dropped 4.32% to 3,923 and the Nasdaq Composite sank 5.16%.

Just 6 stocks in the S&P 500 closed in positive territory.

The pain was also felt on the FTSE which fell 1.17% overnight.

The Australian futures market fell 2.27% before the opening.

Why the sudden crash?

Like most things in investing in 2022, it can be summed up in 1 word.

Inflation.

Consumer price index (CPI) in the US increased by 0.1% in August. Figures from the US Department of Labor show that any relief in fuel prices was short-lived.

In fact, higher prices on food and rent meant inflation rose.

This went against market expectations which were predicting a fall in oil prices and the US dollar meant inflation was peaking.

As such in the lead-up, the market was aggressively buying.

“Markets rallied this summer as investors mistakenly connected the inflation peak with a likelihood that the Fed would soon wrap its monetary hiking cycle,” says Principal Global Investors chief global strategist Seema Shah.

“Instead, the Fed has remained steadfast in not letting a deteriorating economy get in the way of additional monetary tightening – sending the summer rally into reverse,” Shah added.

What’s next?

If the market wasn’t on Fed watch before it certainly will be today.

Widely predicted to have short-term pain in September with a 75-basis-point rise, the pace of future rate rises was predicted to slow.

This has now all changed.

Investors will be looking for signs the worst of inflation is over.

Positive commentary could see the relief rally continue while negative signs will likely see another market pull-back.