Wall Street fell even further on Monday, sending the S&P 500 down more than 20% from its all-time high amid growing fears of a possible recession given stubborn inflation.
The S&P 500 was down 3.3% in investors’ first chance to trade after having the weekend to ponder the startling news that inflation is getting worse, not better. The Dow Jones Industrial Average was down 738 points, or 2.4%, at 30,653 as of 10:30 a.m. EST, and the Nasdaq composite was down 3.9%.
The center of attention on Wall Street was once again the Federal Reserve, which is struggling to control inflation. Its main method is to raise interest rates to slow the economy, a blunt tool that risks a recession if used too aggressively.
Some traders are even speculating that the Fed could raise its main short-term interest rate by three-quarters of a percentage point on Wednesday. That’s triple the usual amount and something the Fed hasn’t done since 1994. Traders now see a 30% chance of such a mega-rise, up from just 3% a week ago, according to CME Group.
No one thinks the Fed will stop there, with markets bracing for a continued streak of bigger-than-usual increases. That would come on top of some already discouraging signals about the economy and corporate earnings, including a record early reading on consumer sentiment that has been soured by high gasoline prices.
It’s quite a sharp turnaround from the start of the pandemic, when central banks around the world cut rates to record lows and took other measures that supported stock prices and other investments in the world. hope of reviving the economy.
These expectations are also driving US bond yields to their highest levels in years. The two-year Treasury yield climbed to 3.23% from 3.06% on Friday night, its second consecutive major move higher. It has more than quadrupled this year and reached its highest level since 2008.
The 10-year yield has risen from 3.15% to 3.29%, and the higher level will make mortgages and many other types of loans for households and businesses more expensive.
The spread between two-year and 10-year yields is also narrowing, a sign of heightened pessimism about the economy in the bond market. If the two-year yield exceeds the 10-year yield, some investors see this as a sign of an impending recession.
The pain was global as investors braced for more aggressive moves from a coterie of central banks.
In Asia, the indices fell by at least 3% in Seoul, Tokyo and Hong Kong. Shares there were also hurt by concerns over COVID-19 infections in China, which could prompt authorities to resume tight restrictions that are slowing business.
In Europe, the German DAX lost 2.6% and the French CAC 40 fell 2.9%. The FTSE 100 in London fell 1.8%.
Some of the biggest hits have come from cryptocurrencies, which soared at the start of the pandemic when record high interest rates encouraged some investors to pile into riskier investments. Bitcoin fell more than 15% and fell below $23,254, according to Coindesk. It is back to where it was at the end of 2020 and down from a high of $68,990 at the end of last year.
On Wall Street, the S&P 500 was 21.3% below its record set at the start of the year. If it ends the day more than 20% below that high, it would enter what investors call a bear market.
Bears are hibernating, so bears represent a pullback market, said Sam Stovall, chief investment strategist at CFRA. By contrast, Wall Street’s nickname for a booming stock market is a bull market, as the bulls charge, Stovall said.
The last bear market was not that long ago, in 2020, but it was exceptionally short and only lasted about a month. The S&P 500 approached a bear market last month, briefly dipping more than 20% below its all-time high, but it did not end a day below that threshold.
It would also be the first bear market for many novice investors who got into stock trading for the first time after the pandemic, a time when stocks largely appeared to be going up. That is, they did so until inflation showed that it was worse than just a transitory problem as originally portrayed.
Michael Wilson, a strategist at Morgan Stanley who is among the most pessimistic voices on Wall Street, sticks to his view that the S&P 500 could fall to 3,400 even if it avoids a recession over the next year. .
That would mark another drop of around 10% from the current level, and Wilson said it reflects his view that Wall Street’s earnings forecast is still too optimistic, among other things.
Soaring price tags in stores are worsening sentiment among shoppers, even those with high incomes, Wilson said in a report that the next shoe to drop is a discount cycle “as companies try to eliminate accumulated inventory .
Such moves would reduce their profitability, and the price of a stock goes up and down largely on two things: how much cash the company generates and how much an investor is willing to pay for it.
Fed moves play an important role in this second part, as higher rates make investors less willing to pay high prices for risky investments.
Deutsche Bank economists said they expect the Fed to raise rates more than usual on Wednesday, again in July, then again in September and a fourth time in November. Just a week ago, before Friday’s wake-up call for an inflation report, Wall Street was debating whether the Fed might pause rate hikes in September.
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