Markets tumble globally, bear market growls on Wall Street

Wall Street plunged even more on Monday, pushing the S&P 500 down more than 20% from its record amid mounting fears of a potential recession amid persistent inflation.

The S&P 500 was down 3.3% in investors’ first trading opportunity after they got the weekend to reflect on the startling news that inflation is getting worse, not better. The Dow Jones Industrial Average fell 738 points, or 2.4%, to 30,653, as of 10:30 a.m. Eastern Time, and the Nasdaq composite was down 3.9%. Wall Street’s focus was once again on the Federal Reserve, which is making efforts to control inflation.

The main method is to raise interest rates to slow the economy, a blunt instrument that risks a recession if used too aggressively. Some traders are even speculating that the Fed could raise its key short-term interest rate by three-quarters of a percentage point on Wednesday. That’s three times 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 as markets brace for a continued series of more than usual gains. Those would come on top of some already discouraging signals about the economy and corporate earnings, including a record-low preliminary reading on consumer confidence soured by high gasoline prices.

It’s all a whiplash reversal from earlier in the pandemic, when central banks worldwide cut rates to record lows and made other moves that pushed up prices for stocks and other investments in hopes of boosting the economy. Such expectations are also pushing US bond yields to their highest level in years.

Two-year government bond yields shot up to 3.23% from 3.06% at the end of Friday, the second major gain in a row. It has more than quadrupled this year, reaching its highest level since 2008. The 10-year yield rose from 3.15% to 3.29%, and the higher level will make mortgages and many other types of loans more expensive for households and businesses.

The difference between the two-year and the ten-year yields is also narrowing, a signal of increased pessimism about the economy in the bond market. If the two-year yield surpasses the 10-year yield, some investors see it as a sign of an impending recession. The pain was global as investors braced for more aggressive moves from a group of central banks.

In Asia, indices fell by at least 3% in Seoul, Tokyo and Hong Kong. Stocks there were also hurt by concerns about COVID-19 infections in China, which could prompt authorities to resume strict business-delaying restrictions. In Europe, the German DAX lost 2.6% and the French CAC 40 lost 2.9%. London’s FTSE 100 fell 1.8%.

Some of the biggest hits came for cryptocurrencies, which boomed early in the pandemic as record low interest rates encouraged some investors to get into the riskiest investments. According to Coindesk, Bitcoin fell more than 15% and dropped below $23,254. It’s back to where it was at the end of 2020, falling from a high of $68,990 late last year.

On Wall Street, the S&P 500 was 21.3% lower than the record reached early this year. If it ends the day more than 20% below that high, it would go into what investors call a bear market. Bears hibernate, so bears represent a retreating market, said Sam Stovall, chief investment strategist at CFRA.

In contrast, Wall Street’s nickname for a rising stock market is a bull market, because bulls charge, Stovall said. The last bear market was not too long ago, in 2020, but it was an unusually short one lasting only about a month. The S&P 500 came close to a bear market last month, briefly diving more than 20% below its record, but it never finished a day below that threshold. This would also be the first bear market for many novice investors who traded stocks for the first time after the pandemic, a period when stocks seemed to be mostly only going up.

That is, they did it until inflation showed it was worse than just a “temporary” problem, as initially suggested. Michael Wilson, a Morgan Stanley strategist who is among Wall Street’s more pessimistic voices, maintains his view that the S&P 500 could fall to 3,400 even if a recession is avoided in the coming year.

That would mean another drop of about 10% from current levels, and Wilson said this, among other things, reflects his view that Wall Street’s earnings forecasts are still too optimistic. With soaring price tags in stores souring sentiment for shoppers, even higher earners, Wilson said in a report that “the next shoe to fall is a discount cycle,” as companies try to clear their accumulated inventories.

Such moves would hurt their profitability, and a stock’s price moves up and down largely because of two things: how much money the company generates and how much an investor is willing to pay for it. Fed moves play a big part in that 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 raise interest rates by larger-than-usual amounts 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 on an inflation report, Wall Street debated whether the Fed would pause rate hikes in September.

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