Stock ETFs Continue to Fall as Inflationary Concerns Mount | ETF Trends

Stocks and index ETFs tumbled on Wednesday, setting up for a third day of losses, amid pressure from technology declines and important inflation data showing elevated prices.

The Dow Jones Industrial Average lost 1.2%, following its largest down day since February on Tuesday. The S&P 500 shed 1.52%, while the Nasdaq Composite plummeted another 2.5%.

Major stock ETFs are dropping on Wednesday as well. The SPDR Dow Jones Industrial Average ETF (DIA), SPDR S&P 500 ETF Trust (SPY), and Invesco QQQ Trust (QQQ) are all broadly lower just after 12:15 PM EST.

With the S&P 500 dropping below key technical levels, selling pressure intensified Wednesday, with the majority of the market bathed in red. Exceptions could be found in energy and financials, however, as the Energy Select Sector SPDR Fund (XLE) climbed more than 2.81%, while the SPDR S&P Regional Banking ETF (KRE) showed just minor losses compared to the broader market.

Inflation ramped up the quickest since 2008 last month, with the Consumer Price Index surging 4.2% from a year ago, compared to the Dow Jones projection of a 3.6% increase. The monthly gain was 0.8%, versus the anticipated 0.2%.

The Core CPI Is Spiking

Excluding volatile food and energy prices, the core CPI spiked 3% from the same period in 2020 and 0.9% on a monthly basis. The respective estimates were 2.3% and 0.3%.

“The markets have been hovering around all times highs with a lot of the reopening trade already priced in. So it’s not out of the question that the outsized inflation read could bring us back down to earth a bit,” said Mike Loewengart, managing director of investment strategy at E-Trade.

“Keep in mind the Fed has made it clear that it won’t let inflation increases necessarily sway it from its easy money policies and further any jumps like this could be transitory. So is this a trend? That remains to be seen,” Loewengart said.

Bond yields, which had been dropping slowly lately, surged once again this week, tanking bond prices, which run inversely to yields, and dragging down tech companies, which are affected by borrowing rates. Alphabet, Microsoft, Facebook, Amazon, and Apple all lost over 2%, while the Vanguard Information Technology ETF(VGT) tumbled over 2.5% Wednesday.

Financial and banking stocks were less affected by the broad-market selloff since they tend to perform well in an inflationary environment.

“While the surge in inflation over the past year was driven in part by base effects, given last year’s economic lockdowns, we are seeing prices rise for all sorts of things, like lumber, auto parts, semiconductors, groceries and gasoline,” said Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded.

“I expect inflation data to remain elevated over the coming months, given the widespread reopening of the economy, shortages or delays in many manufactured goods and a dovish Federal Reserve that is willing to let inflation run above its 2% target,” Davis added.

For investors looking for a potential hedge against inflation, the Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) is one fund to consider.

IVOL seeks to hedge the risk of increased fixed income volatility and rising inflation and to profit from rising long-term interest rates or falling short-term interest rates, often referred to as a steepening of the U.S. interest rate curve, while providing inflation-protected income. The Fund invests in a mix of TIPS.

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