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On Friday, the Labor Department said that the Personal Consumption Expenditures index, the Fed’s preferred measure of inflation, rose 5.8 percent in the year through December, the fastest jump since 1982.
The concern on Wall Street is that interest rates will climb too quickly, hurting corporate profits, hindering consumer demand and discouraging investments in stocks.
“With inflation sky high and the Fed potentially looking to hike rates four times across the year, if not more, the markets fear that the U.S. economy will struggle to absorb such an aggressive approach from the U.S. central bank,” said Fiona Cincotta, a markets analyst at Forex.com.
This worry has been most obvious in shares of technology companies, and even after Friday’s rally the Nasdaq composite, is down 12 percent in January — on track for its biggest drop since October 2008.
Though the broader S&P 500 has fared better, in large part because a rally in oil prices has lifted shares of energy companies, it remains close to a critical threshold: a drop of 10 percent from its last record, which on Wall Street is called a correction. A drop of that size is considered a marker of investors’ swiftly changing attitudes about prospects for the economy.
“A correction signifies that the economy has really lost momentum,” said Mr. Moya. After Friday’s rally, the S&P 500 was down 7.6 percent from its Jan. 3 high. The Nasdaq composite is already in a correction, however, and is down 14 percent from its record, which it reached in November.
So, some analysts cautioned against reading too much into Friday’s bounce.
“Markets were up today, driven by corporate earnings and perhaps some bargain hunting,” said Greg McBride, the chief financial analyst at Bankrate.com. “But one in a row is not a streak, and it could be different on Monday.”
Eshe Nelson contributed reporting.
