began on Wall Street on Monday in the tech sector.
Traders remain unsettled by rising prices and the impact that could have on inflation. In turn, this could prompt central banks to rein in monetary stimulus sooner.
The S&P 500 was 1.6 percent lower on Tuesday, while the tech-heavy Nasdaq dropped 1.2 percent after the index fell 2.6 percent on Monday.
The Stoxx Europe 600 index dropped 2.3 percent, the worst day since late December. The Nikkei 225 in Japan closed 3 percent lower.
Commodity prices have soared recently. Futures on copper, which is often seen as a barometer for the global industrial economy, reached record highs on Friday and oil prices have recently hovered near levels not seen since 2018. Even though commodities pulled back from their highs on Tuesday, the elevated prices are expected to raise costs for businesses.
It’s fuel for a debate about how temporary the increase in inflation this summer will be. Federal Reserve policymakers have said they expect it to be transitionary — because bottlenecks in supplies will be resolved, and comparisons to last year’s slowdown make inflation numbers appear worse.
Still, investors have been spooked by the prospect that the Fed might be forced to raise interest rates to rein costs in sooner than it has indicated it will. Higher interest rates discourage risk taking in the markets, and high-flying stocks can be hit hard when concern about inflation dominates. On Wednesday, the U.S. government will report its Consumer Price Index for April.
On Monday, a survey showed Americans’ year-ahead inflation expectations rose to 3.4 percent in April, the highest level since 2013, but the longer-term outlook — over the next three years — held steady at 3.1 percent.
“The recovery in demand coupled with the supply disruptions across the world are raising fears” that the jumps in inflation reported over the next few months “may not quickly reverse,” Henry Ward, an analyst at HSBC, wrote in a note. “Commodity prices from lumber to oil are rising and house prices continue to hit new highs.”
On Tuesday, oil prices fell. Futures on West Texas Intermediate, the U.S. crude benchmark, dropped 0.5 percent to $64.63 a barrel. Last week, the price climbed above $65 to the highest since October 2018.
“We are now entering a time of year when stocks have historically found it more challenging to advance,” Mark Haefele, the chief investment officer at UBS Global Wealth Management, wrote in a note. With stock indexes already near record highs and concerns rising about coronavirus variants, “investors may be tempted to follow the old adage: Sell in May and go away,” he wrote.
But he recommended that investors stay in the market, despite expected volatility, because the government spending coupled with consumer spending as economies further unlock will lead to more economic growth, which would be good for stocks.