Dow Plunges 876 Points

The Dow Jones Industrial Average fell 876 points today, as investors digested a bad inflation report from Friday and then turned their attention to the Federal Reserve’s June meeting, which starts tomorrow. Meanwhile, the S&P 500 fell nearly 3.9% today and finished in bear-market territory, down close to 22% this year.

The issue at hand started Friday when investors were caught off guard by an inflation reading that was worse than expected. The Consumer Price Index (CPI), which tracks a basket of daily goods and services and is one data point investors use to measure inflation, was up 8.6% year over year as of May. Economists had only expected the CPI to come in 8.3% higher, which stoked fears that inflation may not have peaked and could even still be getting worse.

Image source: Getty Images.

With inflation still potentially surging, investors are now worried the Fed will have to get more aggressive this week. The market was already expecting a half-point increase to its benchmark federal funds rate, but now some think the Fed may go a step further with a three-quarter percentage point rate hike in order to try and get inflation under control.

Steeper rate hikes are likely to create more volatility in the market. Yields on the 2-year Treasury note briefly rose above those on 10-year U.S. Treasury notes, in what many consider to be a sign of a looming recession.

One survivor

Most of the stock market took an absolute beating today. In the Dow, the aviation company Boeing (BA -8.77%) was the index’s worst performer, finishing the day close to 9% down. If there is a possible recession, airlines may once again have to tighten their budgets, which could sideline new plane purchases that move the needle for the company.

Other losers in the Dow included Salesforce (CRM -6.96%)American Express (AXP -5.26%), and Dow  (DOW -5.16%), as few sectors were spared today.

But McDonald’s (MCD 0.46%), one of the largest fast-food chains in the world, managed to buck the trend and was the only stock in the Dow to finish higher, up nearly 0.5%.

Like other consumer brands, McDonald’s expects to raise its prices to deal with the pressure it’s seeing due to inflation. But recently, the company’s international President Ian Borden said that McDonald’s will not go too fast with price increases in order to make sure it’s not alienating its customers. With customers also feeling the strain from higher grocery prices, investors may view this as a measured approach. With one of the most powerful and iconic fast-food brands in the world, customers are not likely to stop going to McDonald’s just because of inflation.

All eyes are on the Fed

The Fed is currently under a microscope, and I don’t see a lot of ways it can win this week. If the Fed only increases rates by a half-point, the market may wonder if the Fed is behind the curve, as it has seemingly been this whole year with its struggles to contain inflation.

And if the Fed does go with a three-quarter point hike, that could put further pricing pressure on consumers and businesses and increase the likelihood of tipping the economy into a more severe recessionary situation. 

While the near-term outlook is incredibly uncertain, the Fed seems like it is now going to do whatever it needs to in order to get prices under control, so I feel like at some point we will see inflation peak this year. Up until now, the economy has been relatively resilient, so if the Fed can get inflation under control soon, perhaps it can do so without tipping the economy into a severe recession.

Take advantage of the recent drop in equity prices to look for bargains with good long-term prospects.