Why Dow Jones, Nasdaq, S&P 500 fell 2% overnight, wiping off millions in wealth

Wall Street tumbled sharply overnight on Wednesday, as all three major indexes ended lower, led by selloffs in technology, consumer discretionary, industrials and financial stocks. The Dow Jones Industrial Average fell 2.06%, the S&P 500 lost 2.01% and the Nasdaq Composite dropped 2.5% as sentiments soured on S&P Global’s PMI data. Business activity in the U.S. rebounded sharply, touching an eight-month high, which sent fears of further rate hikes soaring.

S&P Global Services PMI

The S&P Global Flash US PMI Composite Output Index registered 50.2, rising sharply from 46.8 in the previous month. A print above 50 is seen as a positive indicator, and February’s numbers clocked in as the highest in eight-months. Service sector firms in America saw a growth while manufacturing reported a slower decrease in output.

Service sector and inflation

Some companies continued to highlight that as a result of rising interest rates and inflations, customers demonstrated significant hesitancy, however demand continued to rise. The report further added that the rate of service sector input cost inflation remained high even though it eased to the second-weakest level since October 2020. S&P Global suggested that a primary factor behind higher cost burdens were wage pressures. To offset this, the costs were passed onto customers, resulting in the quickest rise in selling prices in four months. This supported a faster rise in employment since the rate of job creation was the steepest since September 2022.

Wall Street believed the hot services sector will further add onto the US Federal Reserve’s woes, as their new metric, ‘core PCE services less housing’ or ‘supercore inflation’ measures the rate of inflation in the country resulting from the services sector. The rise in wages, cost of labor and lower unemployment engendered growth in the sector, lead to fears of a hawkish Fed and further rate hikes.

Wall Street Sentiment

As a result of this data, the U.S. indices posted the worst day decline of 2023. S&P 500 and Nasdaq both ended in red with a loss of more than 2 percent, 2.00% and 2.50% respectively, while Dow Jones declined 2.06%. Benchmark 10-year note yields jumped to the highest since Nov. 10 and were at 3.9584%. The yield curve between two-year and 10-year notes remained deeply inverted at minus 78 basis points, indicating heightened concerns over an impending recession, according to Reuters. Oil prices and gold prices slipped in a volatile session on profit booking, while the dollar index gained, showing the strengthening of the U.S. economy.

Market sentiment over the course of the previous week was bearish, but it further dampened on the data. Fed officials signaled that the U.S. central bank was likely to continue raising rates than was previously estimated. The market was bearish after Fed officials signaled last week that the U.S. central bank was likely to keep raising interest rates for longer than was previously forecast in its bid to tame inflation. Traders are eyeing the minutes of the Fed’s meeting to garner a further insight into the officials’ monetary policy views.