With so much red on their screens, today’s market traders are likely asking, “Why are stocks down today?” This simple question actually has a complex answer. Investors need to understand the broader downturn in the S&P 500, Dow Jones Industrial Average, Nasdaq and Russell 2000.
There’s an old saying in the financial markets: If you want to understand what’s happening with stocks, look at what the dollar’s doing. After all, in the United States — the home of Wall Street — stock prices are measured against the U.S. dollar. Currently, the dollar is strong. That’s probably not good news for stocks.
Of course, you may be wondering how the dollar can be strong when the Consumer Price Index (CPI) rose 9.1% in June. Doesn’t high inflation mean a weak dollar?
In relative terms, not necessarily. With Europe facing a severe energy crisis and recession, the U.S. dollar is comparatively strong to some other currencies. As institutional and retail investors pile up on cash, market traders worry about the value of their stocks going down. Hence, the pullback in market indices.
Why Are Stocks Down Today? The Fed Is Key.
A strong dollar isn’t the only concern investors have right now, though. They’re also jittery about how the Federal Reserve will respond to the 9.1% inflation CPI reading, along with today’s 11.3 % Produce Price Index (PPI) print.
If you’re not watching the PPI along with the CPI, you ought to be. The PPI measures changes in what producers get paid for goods. If they’re getting paid a lot more in June 2022 than in June 2021, consumers can expect higher prices for those goods.
With such hot CPI and PPI readings, the Fed is under pressure to take aggressive action. This could mean interest rate hikes of 75 or even 100 basis points at upcoming Federal Open Market Committee (FOMC) meetings. Fed Governor Christopher Waller recently indicated that he’s open to an aggressive rate hike this month.
Higher interest rates might put negative pressure on stock prices. This, along with possibly unexpected dollar strength, helps explain why traders are nervous today — and why stock are down in the red.
On the date of publication, David Moadel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.