Stock Market Today: Dow Drops 613 Points After Hawkish Fed Talk

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Stocks started Wednesday trading higher thanks to another encouraging reading on inflation.

However, the major benchmarks couldn't sustain this early lead as dismal retail sales data stoked recession concerns and a Federal Reserve official threw support behind more interest-rate hikes.

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Starting with the good news: The Labor Department this morning said its producer price index – which measures how much suppliers are charging businesses for goods – was up 6.2% year-over-year in December. This was down from November's 7.2% rise and was the lowest annual increase since March 2021. Core CPI, which excludes volatile energy and food prices, increased 4.6%, a slower pace of growth than what was seen in November. Month-over-month, headline PPI fell 0.5%, while core PPI rose 0.1%.

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Today's PPI echoes what was seen in last week's consumer price index – that inflation is indeed easing as a result of the Federal Reserve's aggressive interest-rate hiking campaign. However, inflation is cooling because the Fed's rate hikes are slowing the economy. And this was seen in today's retail sales report. Specifically, the Commerce Department said retail sales were down 1.1% from November to December, marking a second consecutive monthly decline.

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And while today's economic reports might have led investors to believe the Fed could ease up on the scale of future rate hikes, St. Louis Fed President James Bullard said earlier at a Wall Street Journal event that he expects the benchmark rate to reach 5.25% to 5.5% by the end of 2023. This compares to the current rate of 4.25% to 4.5%, and is above market expectations for the benchmark rate to reach no higher than 5.0%, according to CME Group.

At the close, the Dow Jones Industrial Average was down 1.8% at 33,296, the S&P 500 was off 1.6% at 3,928, and the Nasdaq Composite was 1.2% lower at 10,957.

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Today's inflation update "represents another data point supporting the likelihood that producer prices have peaked from their apex last March at 11.7%, and are on their way down," says Greg Bassuk, CEO at asset management firm AXS Investments. "This is very good news for both Wall Street and Main Street, including because trends in producer prices typically seep down to consumers."

Still, inflation remains well above the Fed's 2% target, and "investors would be prudent to remain invested in inflation-sensitive assets," Bassuk adds. These assets include those found in cyclical sectors, like energy stocks and financials. They also include commodities, which have historically proven resilient amid rising prices. While the idea of engaging directly with commodity markets can be intimidating for some, the best commodity ETFs allow investors an easy way to gain exposure to the diverse asset class.

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With over a decade of experience writing about the stock market, Karee Venema is the senior investing editor at Kiplinger.com. She joined the publication in April 2021 after 10 years of working as an investing writer and columnist at a local investment research firm. In her previous role, Karee focused primarily on options trading, as well as technical, fundamental and sentiment analysis.