Some traders are also speculating that the Fed could raise its key short-term interest rate by three-quarters of a percent on Wednesday.
Some traders are also speculating that the Fed could raise its key short-term interest rate by three-quarters of a percent on Wednesday.
Wall Street faltered even more on Monday, sending the S&P 500 down more than 20% from its record, on worsening fears about a potential recession given how stubborn inflation has become.
The S&P 500 was down 3.3% for investors trading after the weekend got it to reflect on the shocking 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. Eastern Time, and the Nasdaq Composite was down 3.9%.
Wall Street’s attention was again on the Federal Reserve, which is scrambling to get inflation under control. Its main method is to raise interest rates to slow the economy, a blunt tool that raises the risk of recession if used too aggressively.
Some traders are also speculating that the Fed could raise its key short-term interest rate by three-quarters of a percent on Wednesday. This is three times the normal amount and the Fed has not done so since 1994. According to CME Group, traders now see a 30% chance of such a mega-hike, up from just 3% a week ago.
No one thinks the Fed will stop there, with the market gearing up for a continuing series of higher-than-usual hikes. They will come on top of some already discouraging signs about the economy and corporate profits, including a record-low preliminary reading on consumer sentiment that was soured by higher gasoline prices.
It’s a whiplash turnaround already in the pandemic, when central banks around the world slashed rates to record lows and hiked prices for stocks and other investments in hopes of juicing the economy.
Such expectations are sending US bond yields to their highest levels in years. The two-year Treasury yield rose to 3.23% from 3.06% late Friday, marking its second straight big move. It has more than quadrupled this year and touched its highest level since 2008.
The 10-year yield rose to 3.29% from 3.15%, and the higher level would make mortgages and many other types of loans for homes and businesses more expensive.
The gap between two-year and 10-year yields is also narrowing, indicating growing pessimism about the economy in the bond market. If the two-year yield tops the 10-year yield, some investors see this as a sign of an impending recession.
The pain was around the world as investors took more aggressive moves from a slew of central banks.
In Asia, the index fell 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 officials to restart tough, business-slowing restrictions.
In Europe, Germany’s DAX fell 2.6% and the French CAC 40 fell 2.9%. The FTSE 100 in London fell 1.8%.
Some of the biggest hits came for the cryptocurrency, which peaked at the start of the pandemic when record-low interest rates encouraged some investors to pile on riskier investments. According to CoinDesk, bitcoin is down more than 15% and is trading below $23,254. It is back where it was at the end of 2020, down from a peak of $68,990 late last year.
On Wall Street, the S&P 500 was down 21.3% from its record set earlier this year. If it ends the day more than 20% above that high, it will enter what investors call a bear market.
Bears hibernate, so bears represent a market that is retreating, said Sam Stovall, chief investment strategist at CFRA. In contrast, Wall Street’s nickname for a rising stock market is a bull market, because the bulls charge, Stovall said.
The last bear market was not long ago, in 2020, but it was an unusually short one that lasted only a month. The S&P 500 reached the close of a bear market last month, losing more than 20% from its record, but it didn’t end a day below that range.
It will also be the first bear market for many novice investors who got into stock trading for the first time since the pandemic, a time when stocks largely seemed only to go up. That is, they did until inflation showed that it was worse than just a “transient” problem as was initially portrayed.
Michael Wilson, a Morgan Stanley strategist who is among Wall Street’s more pessimistic voices, is sticking to his view that the S&P 500 could drop to 3,400 even if it survives a recession next year.
This would mark a drop of about 10% from current levels, and Wilson said it reflects his view that Wall Street’s earnings forecast is still too optimistic, among other things.
With price tags rising for shoppers, even higher-income ones, Wilson said in a report that “the next shoe to drop is a discount cycle” as companies try to clean up built-up inventory. Let’s try
Such moves would cut into their profitability, and a stock’s price moves largely up and down on two things: how much cash a company is generating and how much an investor is willing to pay for it.
The Fed’s move factors heavily in that second part because higher rates make investors less willing to pay higher prices for riskier investments.
Economists at Deutsche Bank said they expect the Fed to raise rates by a larger-than-usual volume on Wednesday, then in July, then in September and for a fourth time in November. A week ago, before the Friday wake of the inflation report, Wall Street was debating whether the Fed could hold off on raising rates in September.