Three weeks ago, Wall Street narrowly escaped a bear market, with stocks bouncing back at the last minute from a brutal slide that sent the S&P 500 down 20 percent from an all-time high in January. The next few weeks offered a glimmer of hope that the worst of the losses might be over.
That shine is now gone.
On Monday, the S&P fell 3.9 percent, closing the day nearly 22 percent below its Jan. 3 high and firmly in a bear market, a rare and gloomy indicator of growing investor concern about the economy.
Together, the data undermines optimism that the Federal Reserve, as it raises interest rates, could keep price gains in check without hurting the US economy and sending ripples around the world.
Trading on Monday ended with reports that the Fed is likely to discuss making its biggest interest rate hike since 1994 when policymakers meet this week.
“The Fed needs to raise interest rates more aggressively if it has any hope of reducing inflation,” said Seema Shah, chief global strategist at Principal Global Investors. “If it’s going to have to tighten even more, then the chance of a recession is higher.”
Big stock declines like this, only the seventh bear market in the last 50 years, usually accompany a tectonic shift in the economy’s outlook and hit people’s retirement accounts. While one does not cause the other, recessions have historically followed bear markets. The last time stocks fell this much was at the start of the coronavirus pandemic, and before that was during the 2007-8 global financial crisis, which brought down some of the world’s biggest banks.
However, the bear market in 2020 lasted only a relatively short six months. Stock market analysts fear that this fall will last longer.
Concerns about the US economy weighed on stock markets in Australia, Japan and China, which all opened lower. In Australia, the key stock index fell 5 percent on Tuesday morning, falling to its lowest levels in two years. Japan’s Nikkei stock index fell 1.6 percent, and China’s Shanghai Composite Index fell about 1 percent in early trading.
Stocks are falling now as businesses and consumers face rising costs almost everywhere they turn and investors fear the Fed will hit the economy in its bid to rein in inflation. The central bank has already raised interest rates twice this year, and Wall Street is bracing for interest rates, which were close to zero in March, to rise as high as 3 percent in September. The last time the fed funds rate was this high was during the Great Recession.
The setting of higher policy rates percolates through the economy to make lending of everything from mortgages to business debt more expensive. That slows down the housing market, prevents consumers from spending and discourages business expansion.
But interest rates are a blunt tool and their impact on the economy is delayed, making it difficult for the Fed to know if it has gone too far before it is too late.
“By the time you start getting infected and realize you did too much, you’re in a deep abyss,” said Dan Genter, chief executive of Genter Capital Management, an investment advisory firm. “It will take nine to 12 months before you see the full effects, and it takes that long to come out of it.”
Borrowing costs are rising as $5-a-gallon gas and higher food costs, rents and home prices begin to take a toll on households, Genter added. That, in turn, hurts consumer spending, which has long been the main driver of the US economy.
“My fear is that basically the Fed is tightening too much and potentially throwing us into a serious recession,” he said.
A bear market that’s when stocks fall 20 percent from a recent high. That happened on Monday, when the S&P 500 fell 22 percent since Jan. 3.
Here are some past examples of bear markets →
Monday’s selloff, the worst daily drop in a month, hit several corners of financial markets. All major US stock sectors ended lower, as did benchmark indices in Europe and Asia. Oil prices and government bonds fell similarly. And Bitcoin dipped below $24,000, an 18-month low. The cryptocurrency has lost around half of its value this year.
On Wednesday, the Federal Reserve will release its latest economic projections, which are likely to be closely watched by investors. They can rest easy if the central bank projects a more moderate-than-expected path for interest rate hikes.
But for investors to really stop worrying, they will have to see inflation slow in the coming months, said Lauren Goodwin, an economist and portfolio strategist at New York Life Investments.
Another unanswered question for investors is the impact of the other Federal Reserve policy change. After buying government bonds to help keep cash flowing through the financial system, an emergency measure that began early in the pandemic, the central bank is changing course.
“This is a huge wild card for investors,” said Ms Goodwin.
A second stage of the market downturn is likely yet to come, Shah said. Stocks could fall further as evidence of economic troubles appears in corporate profits, consumer spending and other data showing the worst expectations for the economy are coming true. The new wave of sales may not happen until closer to the end of this year.
All the talk of recessions and bear markets could also, at least at the margins, increase economic pressure, in part because people see their investment, retirement, or college savings accounts shrink and begin to cut back on spending. .
“The behavioral effect is that people will start to cut back on spending, become much more cautious and start saving more,” said Beth Ann Bovino, chief US economist at S&P Global. “That is not a good result for the economy. It retards growth.”
The report was contributed by alexandra stevenson, jason karian, David Yaffe-Bellany, clifford krauss, ben casselman, eshe nelson, melina delkic Y Isabella Simonetti.