Dow plunges sharply as Wall Street worries about drastic Fed action

The Dow (UNDUE) sank 876 points or 2.8%. The Nasdaq is down 4.7% and has fallen more than 10% in the past two trading sessions.

The broader S&P 500 fell 3.9%. This index is now more than 20% below its all-time high reached in January, putting stocks in a bear market.

Recession fears rose after Friday’s dismal consumer price index report showed inflation in the United States was significantly higher than economists had forecast last month. This could make the Federal Reserve’s inflation control efforts more difficult.

After raising rates by half a point in May – a step the Fed had not taken since 2000 – Chairman Jerome Powell promised the same until the central bank was convinced that inflation was under control. At that point, the Fed would resume standard quarter-point hikes, he said.

But after May’s hotter-than-expected inflation report, Wall Street is increasingly calling for tougher action from the Fed to keep prices in check. Jefferies joined Barclays on Monday in predicting the Federal Reserve would raise rates by three-quarters of a percentage point, a step the Fed has not taken since 1994.

“After holding their breath for nearly a week awaiting the US CPI report for May, investors exhaled in exasperation as inflation turned stronger than expected,” said Sam Stovall , chief investment strategist at CFRA, in a note to clients Monday morning.

Stovall said the risk of bigger upsides dragged markets lower on Monday.

Investors fear two outcomes, neither of which is good: higher rates mean higher borrowing costs for companies, which can erode their bottom line. And overzealous action by the Fed could unwittingly push the U.S. economy into a recession, especially if companies start laying off workers and the scorching real estate market crashes.

There are no signs that the jobs and housing markets are in danger of collapsing, although both are cooling somewhat.

In an interview with CNN’s Fareed Zakaria on Sunday, former Fed Chairman Ben Bernanke said a US recession remains possible. But Bernanke said he believes Powell and the Fed could achieve a so-called soft landing, the elusive outcome in which the central bank can cool the economy to bring inflation under control without slowing it to the point that it is entering in recession.

“Economists are very bad at predicting recessions, but I think the Fed has a decent chance – a reasonable chance – of achieving what Powell calls a soft landing, either no recession or a very mild recession to drive down inflation,” Bernanke said. .

Analysts appeared to move beyond a “buy the dip” mentality on Monday, signaling that they don’t see markets recovering quickly.

“Valuations aren’t much cheaper given higher interest rates and a weaker earnings outlook, in our view,” BlackRock strategists wrote in a Monday note. “A higher policy rate path warrants lower equity prices. Additionally, margin pressures pose a risk to earnings.”

BlackRock will remain neutral on equities for the next six to 12 months, the strategists said.

Bears and bulls

The S&P 500 closed in a bear market, so the bull run that started on March 23, 2020 has come to an end. But, because of the tricky way these things are measured, the bear market technically started on Jan. 3, when the S&P 500 hit its all-time high.

That means the last bull market lasted just over 21 months — the shortest on record, according to S&P Dow Jones Indices senior analyst Howard Silverblatt. Over the past century, bull markets have averaged about 60 months.

The shortest bull market followed the shortest bear market, one that lasted just over a month – from February 19 to March 23, 2020. Bear markets historically last an average of 19 months, according to Silverblatt.

Stocks briefly fell into a bear market on May 20, although a late-day rally saved the market from closing below that threshold for the first time since the early days of the pandemic.

The tech-heavy Nasdaq has been in a bear market for some time and is now more than 32% below its all-time high set in November 2021. The Dow is still a long way from a bear market. It has fallen about 16% from the all-time high reached on the last day of 2021.

— Nicole Goodkind of CNN Business contributed to this report

Leave a Comment

Your email address will not be published.