By Joe Wallace
U.S. stocks dropped alongside commodities, overseas shares and bitcoin on Wednesday as investors' risk appetite diminished.
The Dow Jones Industrial Average fell 445 points, or 1.3%, and the S&P 500 dropped 1.2%, putting the major indexes on track to extend losses. The Nasdaq Composite lost 0.9%, with the biggest tech stocks, Apple, Amazon, Microsoft and Alphabet, all down in morning trading.
Investors sought havens, buying bonds and sending the yield on the 10-year Treasury note down to 1.620% from 1.641% Tuesday. Yields fall when bond prices rise. Gold, meanwhile, was up 0.8% to $1,884.
The capital markets have been rallying sharply for more than a year on a bet that eventually economic growth would resume its pre-pandemic pace. Economic reports have shown an economy that is rebounding, but markets have been pricing in even more aggressive growth. That dynamic is starting to reverse itself, said Michael Gayed, a portfolio manager and author of the Lead-Lag Report newsletter.
"The market is going to start to wake up to the fact that the reflation narrative that's been sold has probably been overbought," Mr. Gayed said. "It could be a nasty situation."
Stocks have soared since March 2020, powered higher in part by support the Federal Reserve has doled out to markets and the economy since the early days of the pandemic. Now, a quickening pace of inflation has led some investors to ask whether the central bank will taper its bond purchases and raise interest rates. Although Fed officials have said the economy is still in recovery mode and requires stimulus from the central bank, that prospect has led stocks and other riskier assets to wobble in recent weeks.
"The key driver now is the central banks," said Nadège Dufossé, head of cross-asset strategy at Candriam. She expects the Fed to hold off on providing guidance about tapering stimulus until September, by which time data should give a clearer picture of the outlook for inflation.
Stocks are likely to be volatile and could experience a 10% correction meanwhile, Ms. Dufossé said, though she added that the market is drawing support from strong earnings growth and evidence that coronavirus vaccines are highly effective. The S&P 500 closed just 2.5% below its all-time high on Tuesday, despite falling for five of the past seven trading days.
In a sign that investors were pulling back from speculative bets that have abounded this year, bitcoin has plunged 15% since 5 p.m. ET Tuesday to $35,734, according to CoinDesk. That marked its lowest price since February and is about 43% below its April high of $64,829.
The selloff in bitcoin sparked selling across cryptocurrencies. Ether declined 30%, dogecoin fell 34% and XRP declined 33%. Shares of Coinbase Global, the largest U.S. bitcoin exchange, dropped 8.9%.
With investors broadly retreating from riskier bets, U.S. crude-oil prices fell 4.9% to $62.28 a barrel. Government data showing crude inventories rose last week, worries that a U.S.-Iran nuclear deal would increase supply and a stronger dollar were also weighing on energy markets Wednesday, analysts said. A stable U.S. currency makes commodities denominated in dollars more expensive for overseas buyers
In corporate news, shares of Target rose 4.5% after the retailer reported robust quarterly sales and a jump in store visits.
Shares of Take-Two Interactive Software rose 5.4%. The company, which owns the Grand Theft Auto videogame, posted quarterly earnings that topped analysts' expectations late Tuesday.
Investors will seek to glean clues about the Fed's thinking when minutes of its April meeting are published at 2 p.m. ET. Officials voted unanimously to maintain the central bank's policies, aimed at holding down borrowing costs, and Chairman Jerome Powell said the recovery remained uneven and incomplete.
Since then, data showed a jump in inflation in April, sparking jitters in the stock market. Technology stocks -- a beneficiary of low rates because their earnings are expected to stretch far into the future -- have been particularly sensitive to the prospect of a rise in borrowing costs.
There is "some concern about what the Fed might be doing over the coming months and quarters when it comes to asset tapering," said Paul Jackson, head of asset allocation research at Invesco, referring to trimming the bond-buying program.
"The U.S. economy is rebounding very, very strongly," Mr. Jackson added. "That, by itself, should make the Fed feel more comfortable that it doesn't need to be providing as much support as it is."
Overseas markets broadly moved lower. The Stoxx Europe 600 fell 1.9%, weighed down by shares of basic-resource, oil-and-gas and technology companies, among other sectors.
In Asia, the Shanghai Composite Index fell 0.5%, while Japan's Nikkei 225 lost 1.3%.
Paul Vigna contributed to this article.
Write to Joe Wallace at Joe.Wallace@wsj.com
(END) Dow Jones Newswires