Wall Street’s focus was once again on the Federal Reserve as it struggles to bring inflation under control.
NEW YORK — Wall Street tumbles even harder on Monday, sending the S&P 500 down more than 20% from its record as fears of a possible recession intensify amid stubborn inflation.
The S&P 500 was 3.3% lower on investors’ first trading opportunity after baiting the weekend to ponder the startling news that inflation is getting worse, not better. The Dow Jones Industrial Average fell 738 points, or 2.4%, to 30,653 at 10:30 a.m. Eastern Time, and the Nasdaq Composite was 3.9% lower.
Wall Street’s focus was once again on the Federal Reserve as it struggles to bring inflation under control. 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 hike its 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. According to CME Group, traders now see a 30% chance of such a mega rise, up from just 3% a week ago.
No one believes the Fed will stop there as markets brace for a continued series of larger-than-usual rate hikes. These would come on top of some already disheartening signals on the economy and corporate earnings, including a record-low preliminary reading of consumer sentiment, which was clouded by high gasoline prices.
It’s all a reversal from earlier in the pandemic, when central banks around the world slashed interest rates to record lows and took other steps that supported the prices of stocks and other investments in hopes of stimulating the economy.
Such expectations are also pushing US bond yields to their highest levels in years. The two-year Treasury yield shot up to 3.23% late Friday from 3.06%, the second big move higher in a row. It has more than quadrupled this year, reaching its highest level since 2008.
The 10-year yield rose to 3.29% from 3.15%, and the higher level will make mortgages and many other types of loans for households and businesses more expensive.
The spread between the 2-year and 10-year yields is also narrowing, signaling growing pessimism about the economy in the bond market. When the two-year yield beats the 10-year yield, some investors see it as a sign of a looming recession.
The pain was global as investors braced for more aggressive moves from a clique of central banks.
In Asia, indices in Seoul, Tokyo and Hong Kong fell at least 3%. Shares there have also been hurt by concerns about COVID-19 infections in China, which could prompt authorities to resume strict, business-inhibiting restrictions.
In Europe, the German DAX lost 2.6% and the French CAC 40 lost 2.9%. The FTSE 100 in London fell 1.8%.
Some of the biggest hits have been cryptocurrencies, which soared early in the pandemic as record-low interest rates encouraged some investors to make the riskiest investments. Bitcoin plummeted more than 15%, falling below $23,254, according to Coindesk. It’s back to where it was in late 2020 and down from a peak of $68,990 late last year.
On Wall Street, the S&P 500 was 21.3% below its record set earlier this year. If it ends the day more than 20% below that high, it would enter what investors are calling a bear market.
Bears hibernate, so bears represent a market that is retreating, said Sam Stovall, CFRA’s chief investment strategist. In contrast, Wall Street’s nickname for an emerging stock market is bull market because bulls charge, Stovall said.
The last bear market wasn’t that long ago, in 2020, but it was an unusually short one, lasting only about a month. The S&P 500 approached a bear market last month, briefly falling more than 20% below its record but never ending a day below that threshold.
It would also be the first bear market for many novice investors entering stock trading for the first time post-pandemic, a time when stocks for the most part only appeared to be rising. That is, they did until inflation showed it was worse than just a “temporary” problem as originally presented.
Michael Wilson, a strategist at Morgan Stanley who is one of the more dovish voices on Wall Street, maintains his view that the S&P 500 could fall to 3,400 even if it avoids a recession next year.
That would mark another drop of about 10% from current levels, and Wilson said it reflects, among other things, his view that Wall Street’s earnings forecasts are still overly optimistic.
With rising price tags in stores clouding sentiment among shoppers, even higher-income shoppers, Wilson said in a report that “the next shoe to drop is a rebate cycle” as companies try to clear built-up inventories vacate.
Such movements would affect its profitability, and a stock’s price moves based on two main things: how much money the company is making and how much an investor is willing to pay for it.
The Fed’s moves play a big part in this second part, as higher interest rates make investors less willing to pay high prices for risky investments.
Economists at Deutsche Bank said they expect the Fed to hike rates by larger amounts than usual on Wednesday, again in July, then again in September and a fourth time in November. Just a week ago, before the wake-up call of an inflation report on Friday, Wall Street was debating whether the Fed might pause on September’s rate hikes.
AP Business Writer Elaine Kurtenbach contributed.
https://www.king5.com/article/news/nation-world/wall-street-tumble/507-8d7cc415-9e18-4572-be1d-e3c7b28bb5f1 Wall Street tumbles, fears of a bear market grow