U.S. stock markets continued their sharp decline on Monday as investment losses continued to pile up, creating an economic vise for many Americans who find themselves pinched between rising gas prices and diminishing investment accounts.
The S&P 500 fell 3.9% on the day and the tech-heavy Nasdaq composite index slumped 4.7%.
The Dow Jones industrial average sank 875 points, or around 2.8%.
Each of the indexes is down sharply in 2022, and there is no clear indication of when the markets could stabilize. Cryptocurrencies also swooned on Monday, with Bitcoin losing more than 10% of its value.
The Federal Reserve is slated to meet Tuesday and Wednesday and it is expected to raise interest rates as a way to tamp down inflation.
But that initiative is also putting immense pressure on the stock market, and there are concerns that the U.S. economy could slip into a recession as a result.
Sustained stock market selloffs could create recessionary pressures, leading consumers to pull back on home-improvement projects, travel, and other spending.
The decline puts the S&P 500 back in bear market territory, defined as a 20% fall from the most recent high, after it briefly touched the benchmark in intraday trading last month.
The Nasdaq, meanwhile, is down more than 30% so far this year.
Analysts described the sell-off as yet another ripple effect of disappointing inflation data reported Friday morning and concerns about how the central bank might respond.
Americans are dealing with a number of concurrent economic forces that have raised concerns that the country could enter a recession even though the unemployment rate remains extremely low and consumers continue spending.
Inflation has persisted much longer than policymakers initially predicted, gaining even more momentum following Russia’s invasion of Ukraine in February.
And the stock market, which rebounded sharply from an initial sell-off in February and March of 2020, has shed parts of its value during the Fed’s campaign to thwart rising prices.
“The hangover from a higher than expected U.S. inflation reading is continuing to cause scissoring pain throughout the markets, as it extinguishes the hope the US Federal Reserve might be able to take its foot off the pedal on interest rate rises,” AJ Bell investment director Russ Mould said in a note Monday.
Sustained market sell-offs, like the one washing through the stock market, create a major conundrum for retail investors, many of whom now find themselves staring at 401(k) statements or investment accounts in disbelief.
They must decide whether to sell now and protect against further downside risk, even though this is something financial advisers almost always caution against.
Or investors must decide whether to stick with it and risk even greater losses so they will be better positioned for the rebound.
Other investors might decide to cut some of their investments but not others. Timing the markets peaks and troughs is incredibly difficult.
The term “bear market” is a loosely-defined investing benchmark that has tremendous psychological weight, says Rod von Lipsey of UBS Private Wealth Management.
There is no magic number that automatically triggers further selling. But the prospect of losing more than 20 cents on every dollar invested – as a bear market indicates – can trigger a certain panic in the mind of the investor, Von Lipsey said.
For everyday people, known as “retail investors” in Wall Street’s lingo, such a large decline can make a real difference in a person’s life and financial plans.
Those individual investment decisions can be amplified by the automated, computer-driven trades that underpin much of the financial system, particularly in the final hour of a day’s trading, analysts say.
“When we hit that bear market territory, fear starts to feed on itself,” von Lipsey said in an interview. “That fear, of not having enough to retire, enough to meet your financial goals, causes people to sell. When fear starts to be the driving force in our behavior, it can become a self-fulfilling prophecy in the markets.”
The downturn is likely to last several months, and the bottom of the market can’t be trusted until the Fed indicates it is almost done tightening up interest rates, says Michael Farr of the D.C.-based advisory firm Farr, Miller and Washington.
In the meantime, it pays to avoid panic, he said.
“Every bear market in U.S. history has passed, and this one will too,” Farr said. “Panic is almost a guarantee to lose. Successful long-term investors suffer through these periods and endure.”
Markets are teetering on whether the Fed can cool down the economy without overdoing it and causing a recession.
The Fed is on track to raise interest rates seven times this year, with the third rate hike expected Wednesday at the conclusion of the central bank’s meeting.
It is expected to raise rates by half a percentage point, as it did in May, but the inexorable pace of inflation has some economists concerned that it will have to act even more aggressively.
The losses were broad-based, sweeping up nearly all sectors in a marketwide sell-off.
Tech companies that surged during the pandemic sold off sharply as their valuations have come under pressure; Peloton, considered a work-from-home tech darling, lost 6.37% Monday, while Amazon dropped 5.45%. Apple declined 3.8% while Tesla lost 7.1%.
Travel-related stocks fell, with Norwegian Cruise Lines and Carnival both down more than 10%.
Manufacturers weren’t spared either: General Motors lost 7.8%, while Boeing stock declined 8.8%.
Even oil companies – bolstered by the run-up in oil prices – saw their valuations tumble on Monday. Chevron declined 4.6%, BP declined 3.8% and ExxonMobil lost 4.6%.
Against the backdrop of rising interest rates are worrisome economic signals that suggest the U.S. economy may already be in a recession, according to Danielle DiMartino Booth, chief executive at Dallas-based Quill Intelligence.
Consumer sentiment slumped to a record low Friday, according to a widely followed index from the University of Michigan, while a poll from The Washington Post and George Mason University found that most Americans expect inflation to worsen in the coming year.
Cracks also are appearing in the job market as weekly unemployment claims – a stand-in for layoffs – climbed by 8,000 to 215,000, measured as a four-week moving average.
“The idea that there is some Goldilocks outcome in the cards or soft landing is a mockery,” DiMartino Booth said. She added: “The only questions that remain are the length and depth of the current contraction.”
The impact of the Fed’s actions can also be seen in the bond market and in the rising mortgage rates, said Bankrate senior analyst Mark Hamrick.
The yield on the two-year U.S. Treasury bond, at 3.22%, is at its highest point since 2007.
Bond yields move inversely to prices, and increases are a sign that many investors are fleeing to safety.
The average rate for a 30-year fixed mortgage reached 5.09%, according to Freddie Mac. A year ago, it hovered near 3%.
“[Federal Reserve] Chairman Jerome Powell and his colleagues are walking a monetary policy tightrope hoping to avoid a recession while dampening demand,” Hamrick said. “The impact is also seen with the slowdown in the housing market, resulting from the highest mortgage rates in over a decade.”
That has had the effect of improving the number of houses for sale in some overcrowded markets, a bit of positive news for homebuyers.
But it also makes mortgages significantly more expensive; before the Fed’s rate hikes a $400,000 mortgage would typically carry a monthly payment of about $1,686, not including taxes and insurance, according to an analysis by Farr, Miller and Washington.
With today’s interest rates, it costs $2,398 – a 30% increase.
Wall Street has been on a downward spiral throughout 2022, as concerns about inflation and interest rates were exacerbated by global events, most notably the war in Ukraine and China’s efforts to stamp out the coronavirus.
The S&P 500 finished down close to 19% year to date at market close on Friday, while the Nasdaq index has erased 28%.
Global markets also were deep in the red Monday, a week after the World Bank warned that subdued growth is likely to persist around the world throughout the next decade.
Hong Kong’s Hang Seng and Japan’s Nikkei each lost more than 3%, while Taiwan’s TSEC 50 fell 2.3%.
European stocks lost ground, too, with Germany’s DAX off 2% and the Pan-European Stoxx declining 2.2%.
Cryptocurrencies also experienced sharp declines. Bitcoin has lost more than 15% of its value in the past 24 hours to settle below $24,000, reaching its lowest point since 2020.
Bitcoin and other cryptocurrencies have tended to rise and fall with the broader stock market.
Amid the crypto plunge Sunday night, Celsius, one of the largest cryptocurrency lenders, said in a blog post that it is pausing all withdrawals, swaps and transfers between accounts in an attempt to protect its account holders from what it called “extreme market conditions.”
The value of all cryptocurrencies fell below $1 trillion, according to coinmarketcap.com, down from a November peak of almost $3 trillion.
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