Image Source: The Business Telegraph
The stock market in the United States has entered a bear market as Wall Street investors become increasingly concerned about the possibility of further tougher Fed action to alleviate the sting of inflation.
The Dow Jones Industrial Average (INDU) dropped 876 points or 2.8 percent. The Nasdaq was down 4.7 percent and lost more than 10% in the previous two trading days.
The S&P 500 index as a whole dropped 3.9 percent. That index is currently more than 20% below its all-time high established in January, indicating a bear market in stocks.
Fears of a recession grew after Friday’s dismal Consumer Price Index report revealed that inflation in the United States was substantially higher than economists had predicted last month. This might make the Federal Reserve’s efforts to keep inflation under control more challenging.
Following a half-point rate hike in May — the first since 2000 — Fed Chair Jerome Powell promised more of the same until the central bank was convinced that inflation was under control. The Fed would then restart its regular quarter-point hikes, he said.
However, following May’s higher-than-expected inflation data, Wall Street is increasingly clamoring for the Fed to take more aggressive steps to keep prices under control. On Monday, Jefferies and Barclays both predicted that the Federal Reserve would raise interest rates by three-quarters of a percentage point, a move the Fed hasn’t made since 1994.
The risk of higher hikes, according to Stovall, pulled the markets lower on Monday.
Investors are concerned about two scenarios, none of which is favorable: Higher interest rates entail higher borrowing costs for firms, which can eat into profits. And the Fed’s overzealous approach could unwittingly send the US economy into a recession, especially if businesses begin to lay off workers and the hot housing market begins to disintegrate. The job and housing markets are not in danger of collapsing, though both are cooling.
Former Federal Reserve Chairman Ben Bernanke suggested a US recession is still a possibility in an interview with CNN’s Fareed Zakaria on Sunday. Bernanke, on the other hand, expressed confidence in Powell and the Fed’s ability to execute a so-called “soft landing,” in which the central bank can cool the economy enough to keep inflation under control without causing it to enter a recession.
On Monday, analysts appeared to move away from the “buy the dip” approach, indicating that they don’t expect markets to recover swiftly.
The Bears and the Bulls have a long and illustrious history
The bull market that began on March 23, 2020, has come to an end, as the S&P 500 concluded in a bear market. However, the bear market technically began on January 3, when the S&P 500 reached its all-time high due to the complicated way these things are measured.
According to Howard Silverblatt, senior S&P Dow Jones indices senior index analyst, the current bull market lasted a little over 21 months, making it the shortest on record. Bull markets have lasted an average of 60 months over the past century.
The shortest bull market lasted just over a month, followed by the shortest bear market, which lasted just over a month, from February 19 to March 23, 2020. According to Silverblatt, bear markets typically last 19 months.
On May 20, stocks briefly entered a bear market, but a late-day recovery saved the market from falling below that level for the first time since the pandemic began.
The Nasdaq, which is heavily weighted in technology, has been in a bear market for some years and is now more than 32% below its all-time high reached in November 2021. The Dow Jones Industrial Average is still far from being in a bear market. It’s down roughly 16% from its all-time high on the last day of 2021.