The Dow Jones Industrial Average slumped nearly 200 points and the broader market sank after Federal Reserve officials implied that interest rates could be raised as early as June.
Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams said the Fed’s decision on whether to raise rates at the June 14-15 meeting hinges on the data. However, June “certainly could be a meeting at which action could be taken,” Lockhart said. The officials were attending a lunch sponsored by the news site Politico.
Jitters over an imminent rate hike battered a market already on shaky footing after consumer prices jumped at the fastest pace in more than three years, largely due to higher gas prices. Meanwhile, construction on new houses rebounded in April after a sharp dip in March.
“This morning’s inflation report was supportive of the U.S. returning to a more normal inflation environment, which on the margin pushes the Fed towards more rate hikes,” said Luke Tilley, chief economist at Wilmington Trust Investment Advisors.
The S&P 500 SPX, -0.94% fell 19.45 points, or 0.9%, to close at 2,047.21, with nine of the 10 main sectors finishing lower. Energy was the only sector in positive territory at closing bell, adding 0.2%.
Higher interest rates are widely viewed as a negative for stocks because they would increase borrowing costs for U.S. companies, possibly suppressing corporate spending and growth. Wall Street has mostly risen during a protracted period of ultralow rates.
“Deflation fears earlier this year have now transitioned to fears of inflationary pressures forcing the Fed’s hand and leading to a quicker pace of future rate increases,” said Mark Heppenstall, chief investment officer of Penn Mutual Asset Management.
Kent Engelke, chief economic strategist at Capitol Securities Management Inc., also blamed the continuing rotation out of “must-own” momentum stocks that have outperformed the broader market last year to value plays which focuses on undervalued shares.
“Moneys are now exiting these must-own stocks that are negatively impacting the averages and buying the value-orientated issues,” he said.
Buffett’s Berkshire Hathaway takes $1 billion Apple stake
Apple stock closed higher Monday after SEC filings revealed that Warren Buffett’s Berkshire Hathaway took a $1 billion position in the tech company in the first quarter of 2016. Photo: Bloomberg News
The market could see more dramatic moves on Wednesday with the release of the April Federal Open Market Committee meeting minutes.
”The direction depends on how dovish or hawkish they are interpreted to be. I expect the minutes to hint that a June hike was thoroughly discussed during the April meeting,” said Tilley,
Movers & shakers: Shares of LendingClub Corp. LC, -8.63% plunged 8.6% after the online lender late Monday revealed a Justice Department investigation and unveiled a potential, dramatic shift in its business model.
West Texas Intermediate crude oil CLM6, +0.37% extended gains to rise 1.2% to settle at $48.31 a barrel.
Crude had jumped more than 3% on Monday after Goldman Sachs said the oil market is now in a supply shortfall.
–Sara Sjolin contributed to this article.