U.S. stock markets continued their sharp decline Monday as investment losses kept piling up, creating an economic vise for many Americans who find themselves pinched between rising gas prices and diminishing investment accounts.
The Federal Reserve is slated to meet Tuesday and Wednesday, and it is expected to raise interest rates as it strives to tamp down inflation. Many analysts had predicted that the central bank would raise rates by half a percentage point, but JPMorgan Chase issued a research note Monday speculating that the Fed could move even more aggressively, raising rates three-quarters of a percentage point or more this week. The note hinted that a sense of urgency could be settling in at the Fed.
The Fed’s campaign is 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 sell-offs have, in the past, led to broader recessionary pressures, forcing households to pull back on things like home-improvement projects and travel.
Monday’s decline puts the S&P 500 back in bear market territory, defined as a 20 percent 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 percent so far this year.
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 2020, has shed value during the Fed’s campaign to thwart rising prices.
“The hangover from a higher than expected US 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 whether to stick with it and chance 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 market’s 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.
“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 that it is almost done tightening up interest rates, said 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.
Monday’s losses were broad-based, sweeping up nearly all sectors in a marketwide sell-off.
Tech companies that surged during the pandemic fell sharply, and their valuations have come under pressure. Peloton, considered a work-from-home tech darling, lost 6.37 percent Monday, while Amazon dropped 5.45 percent. Apple declined 3.8 percent, and Tesla lost 7.1 percent.
Travel-related stocks fell, with Norwegian Cruise Lines and Carnival both down more than 10 percent. Manufacturers weren’t spared either: General Motors lost 7.8 percent, while Boeing stock declined 8.8 percent.
Even oil companies ― bolstered by the run-up in oil prices ― saw their valuations tumble Monday. Chevron declined 4.6 percent, BP declined 3.8 percent, and ExxonMobil lost 4.6 percent.
Against the backdrop of rising interest rates are worrisome 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. “The only questions that remain,” she added, “are the length and depth of the current contraction.”
The average rate for a 30-year fixed mortgage reached 5.23 percent, according to Freddie Mac. A year ago, it hovered near 3 percent.
“[Federal Reserve] Chair Jerome H. Powell and his colleagues are walking a monetary policy tightrope hoping to avoid a recession while dampening demand,” said Bankrate senior analyst Mark Hamrick. “The impact is also seen with the slowdown in the housing market, resulting from the highest mortgage rates in over a decade.”
That has cooled the housing market somewhat, a bit of positive news for would-be home buyers. 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 42 percent increase.
Wall Street has been on a downward spiral throughout 2022, as concerns about inflation and interest rates have been exacerbated by global events, most notably the war in Ukraine and China’s efforts to stamp out the coronavirus.
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 percent, while Taiwan’s TSEC 50 fell 2.5 percent. European stocks lost ground, too, with Germany’s DAX off 2.4 percent and the Pan-European Stoxx declining 2.4 percent.
Cryptocurrencies also experienced sharp declines. Bitcoin has lost more than 12 percent 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 stock market.
Amid the crypto plunge Sunday night, Celsius, one of the largest cryptocurrency lenders, said in a blog post that it was 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.