Business

Stocks enter bear market as Wall Street braces for more rate hikes

Stocks on Monday continued a massive sell-off that started last week on news that inflation had reached a 40-year high and has yet to hit a ceiling despite a monetary tightening program begun by the Federal Reserve.

The S&P 500 dropped 3.87 percent Monday to hit 3,749 from 3,900. This constitutes a move into a bear market for one of the premier indices of U.S. stocks, having fallen more than 20 percent since its recent high of 4,796 in January.

In the two trading days since Friday, the index has dropped more than 6.5 percent from 4,017.

The Dow Jones Industrial Average of major U.S. companies fell 2.79 percent Monday to hit 30,518 from 31,459. The index has seen a drop of around 17 percent since its January high. The Russell 2000 index of smaller U.S. stocks fell more than 4.9 percent Monday, having already entered bear territory on a plunge of nearly 25 percent since the beginning of the year.

The bond market also saw a sell-off Monday that drove up yields and that analysts likened to a Federal Reserve rate hike in its own right. The two-year U.S. Treasury bond rose 27 basis points to hit almost 3.34 percent, with the 10-year note making a similar jump of 22 basis points to offer a 3.37 percent yield.


With the two-year yield rising above the yield of the 10-year note, the bond market saw an “inversion” that is widely seen as a harbinger of recession. The 30-year Treasury note popped 0.17 percent to a yield of about 3.36 percent, just slightly steadier than its shorter-term counterparts that are more sensitive to movements in interest rates.

Those rates are expected to increase again this week after a meeting of the Fed’s Federal Open Markets Committee on Tuesday and Wednesday. The committee has signaled it will continue to raise rates by 50 basis points at its next several meetings, although there is speculation that a 75-point hike could be under consideration.

The goal of the Fed’s rate hikes is a “soft landing,” meaning a drop in prices spurred on by a spike in the cost of borrowing money that doesn’t slow the economy enough to cause a recession. It’s a difficult needle for the Fed to thread since the interest rate hikes that increase the purchasing power of the dollar also tend to diminish capital flows and constrict overall growth.

Consumer sentiment is making this task even more difficult, since consumers are increasingly seeing inflation as inherent to the overall conditions in the economy.

Year-ahead median inflation expectations rose to 6.6 percent in May, up from 6.3 percent, tying a record high since the survey began in June 2013, according to the Fed’s latest household spending expectations survey published Monday. Median three-year-ahead inflation expectations stayed steady at 3.9 percent.

The “sharp rise” in year-ahead inflation expectations, as the Fed characterized it, follows the worst-ever decline of consumer sentiment recorded in the most recent poll from the University of Michigan, which conducts a flagship survey on consumer mood.

The survey found that “consumer sentiment declined by 14% from May, continuing a downward trend over the last year and reaching its lowest recorded value, comparable to the trough reached in the middle of the 1980 recession. All components of the sentiment index fell this month, with the steepest decline in the year-ahead outlook in business conditions, down 24% from May.”

Wall Street titans have been feeling similarly pessimistic over the past few weeks, with Tesla chief Elon Musk having a “super bad feeling” about the economy and threatening layoffs to the tune of 10 percent of salaried employees, according to Reuters, citing company emails.

JPMorgan Chase CEO Jamie Dimon predicted a coming economic “hurricane” earlier this month and warned that investors should brace themselves for worsening conditions.

The opposite of the Fed’s desired soft landing would be a prolonged period of economic “stagflation,” the combination of diminished growth and weaker money that plagued the U.S. economy in the 1970s until a series of drastic interest rate hikes by the Fed tamed prices and sparked a recession.

The World Bank warned last week about the current risk of stagflation, saying in a statement that “the recovery from the stagflation of the 1970s required steep increases in interest rates in major advanced economies, which played a prominent role in triggering a string of financial crises in emerging market and developing economies.”

The World Bank also revised down last week its expectations for the global economy to 2.9 percent gross domestic product (GDP) growth from a 4.1 percent projection made in January.

This is a similar projection to the one made by the United Nations Department of Economic and Social Affairs in May, which put global growth at 3.1 percent, a 0.9 percentage point markdown from one made in January.

“The United States economy is forecast to slow to 2.6 per cent in 2022 due to high inflationary pressures, aggressive monetary tightening by the Federal Reserve and a strong US dollar, worsening net export balances. In China, GDP is projected to expand by 4.5 per cent, a downward revision of 0.7 percentage points, with stringent zero COVID-19 policies adversely affecting growth prospects,” the U.N. agency said in May.

“Global inflation is projected to increase to 6.7 per cent in 2022, twice the average of 2.9 per cent during 2010—2020,” the agency added. “Soaring food and energy prices are having knock-on effects on the rest of the economy, as reflected in the significant rise in core inflation in many economies.”