Wall Street’s frayed nerves were tested further on Friday, with the S&P 500 plunging into a bear market as soaring prices and recession fears sent investors for shelter.
Investors panicked this week on new inflation data and weak corporate earnings as a darkening global economic backdrop leaves little room for optimism. The relentless storm of volatility that has engulfed trade in 2022, the war in Ukraine, the collapse of the supply chain, the highest inflation in decades and the unrelenting complications of the pandemic show no signs of abating. slow-down. Confidence is diminishing in the ability of the Federal Reserve to control inflation without triggering a slowdown.
At times like these, it’s crucial for investors to have a long-term view, according to Wayne Wicker, chief investment officer at MissionSquare Retirement. Bear markets occur in a relatively regular cycle: there have been 14 since 1945, lasting an average of nine and a half months. That’s significantly shorter than bull markets, which last an average of 2.7 years, Wicker said.
The market is, in a sense, behind the times: the last bear market ended in March 2020, at the start of the pandemic, and lasted only 33 days. Apart from this brief and abnormal downturn, there has not been a sustained bear market since 2009, when the financial crisis ended.
We’ve gone over 10 years without a real downside break, Wicker said. There are plenty of investors who may have a 15 year career, but they have never seen inflation and a rising rate environment like the one they are currently involved in.
Global markets were boosted on Friday by news that China had unexpectedly cut a key interest rate as the country grappled with the fallout from tough pandemic restrictions, but fears of a global slowdown growing are still weighing on the trade according to Russ Mould, chief investment officer at AJ Cloche.
Investors fear corporate earnings will come under pressure, companies will invest less money and consumers will cut back on spending, Mold said in a commentary on Friday. Markets are heeding what they think will happen and investors are increasingly fearful of recession.
Shares of Teslas fell 8.5% on Friday amid more doubts about Elon Musks’ acquisition of Twitter and accusations of sexual harassment against the chief executive. Market volatility has been closely aligned with the tech giants over the past few months as investors shy away from high-flying tech stocks. Tesla is down 46% for the year, while Metas shares are down 43% and Amazons is down 37%.
The focus this week has been on retailers as investors contemplate the myriad ways inflation can cripple their businesses, from soaring fuel costs to rising payrolls. Shares of Ross Stores fell 24% after it became the latest retailer to post disappointing results; the discount chain slashed its full-year outlook, pointing to a series of challenges that are eroding sales and margins. Target and Walmart expressed similar worries about soaring costs and shrinking customers earlier this week, when they both endured their worst trading days after their earnings reports spooked investors.
We knew fiscal 2022 would be a difficult year to forecast, especially in the first half when we were faced with record levels of government stimulus last year and significant pent-up customer demand as COVID restrictions were eased, said Barbara Rentler, chief executive of Ross, in a statement. The external environment also proved to be extremely difficult, with the Russian-Ukrainian conflict exacerbating inflationary pressures on the consumer not seen in 40 years.
Retail sales edged up 0.9% in April according to the Commerce Department, suggesting inflation concerns are not yet pushing consumers aside, even as basics like gasoline and groceries become more expensive. But that’s likely to change if the pressures don’t ease, and that’s making investors anxious.
Cboes VIX, dubbed Wall Street’s fear gauge, was up 83% for the year according to MarketWatch.
Another week of incredible market volatility makes it increasingly clear that a strategy of buying the dips is somewhat treacherous, David Donabedian, chief investment officer of CIBC Private Wealth US, said Friday in a commentary. Real-time economic data for May is starting to show early signs of a slowing economy.
Although the market has yet to bottom, Donabedian noted, investors should remember that this is an uncomfortable but normal part of the market cycle.
Gasoline prices hit a new high on Friday, with the U.S. average topping $4.59 a gallon, according to data tracked by AAA. This week, for the first time, the average price exceeded $4 in all US states. At this time last year, the average gallon of gas was just $3.04.
Soaring energy prices present one of the biggest challenges for Group of Seven finance ministers in their upcoming meetings, along with the potential deepening of sanctions against Russia over its invasion of Ukraine . The Europeans discussed new measures to reduce Russia’s oil and gas revenues. The United States has already banned energy imports from Russia, but such a move could drive prices up even further.
Crude prices soared above $112 a barrel on Friday amid pressures.
JPMorgan said this week that the market is pricing in a 70% chance of a near-term recession, suggesting investors lack confidence in the Fed’s ability to contain inflation without triggering a downturn. Fed Chairman Jerome H. Powell himself recently said the central bank should have moved faster to raise rates and left the door open for more aggressive action.
The Fed has raised its benchmark interest rate twice this year, including by half a percentage point on May 4, and is expected to do so five more times this year to ease inflationary pressures. Fed officials have tried to accelerate increases so as not to stifle economic growth, a difficult balance to strike. If the economy cools too quickly, it could slide into a recession, generally defined as two consecutive quarters of negative economic growth.
Asian markets closed higher across the board, boosted by news of China’s rate cut. Hong Kong’s Hang Seng Index jumped nearly 3%, Shanghai’s Composite Index gained 1.6% and Japan’s Nikkei 225 rose nearly 1.3%.
European indices posted fragile gains to cap off the week after suffering steep inflation-fueled losses. The benchmark Stoxx 600 closed 0.7% higher, Britain’s FTSE100 rebounded 1.1% and Germany’s DAX advanced 0.7%.
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