Why did the Dow plunge? ‘Stagflationary shockwaves’ destroy a bear-market bounce

U.S. stocks went back on the downswing in a big way Wednesday, more than erasing the rally of the previous session and underlining warnings from some market veterans that sharp rebounds in what has so far been a down year for equities may be little more than the sort of volatile, short-lived upside rebounds characteristic of bear markets.

The Dow Jones Industrial Average DJIA, -3.57% dropped 1,164 points, or 3.6%, while the S&P 500 SPX, -4.04% shed 4% to end at 3,923 and the Nasdaq Composite COMP, -4.73% dropped 4.7%. That comes after the Dow jumped more than 400 points on Tuesday, while the S&P 500 advanced 2% and the Nasdaq rallied 2.8%.

A failure by the Cboe Volatility Index VIX, +3.49%, sometimes referred to as Wall Street’s fear gauge, to push above the mid-30 range was seen as one sign that investors hadn’t made the sort of “capitulation” that often clears the way for a sustained rebound. However, some positive market internals on the upside during Friday’s and Tuesday’s bounce have some analysts looking for some near-term upside, which could continue to confound market bears.

“Indeed, contagion from bellwether consumer earnings prints is sending stagflationary shockwaves through the market, and equities suffered another massive bout of indigestion after [Tuesday’s] Alka Seltzer moment,” he said.

This is the real reason behind yesterday's plunge.

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