Investors are reeling from the S&P 500’s swift decline
Various factors in world, US have sparked slide toward bear’s jaws
The year started with great optimism when the S&P 500 index touched a record high in January. Since then, it has been all downhill, and the index is suddenly flirting with “bear market” territory, down at least 20% from its peak.
Shell-shocked investors wonder: What happened in five short months?
Surging inflation and how aggressively the Federal Reserve would have to act to tame it weighed on the market. In the 12 months through April, consumer prices rose 8.3%. That was slower than the prior month’s 8.5% clip but still near a four-decade high.
To help rein in inflation, the Fed raised its benchmark fed funds rate at its last meeting by 50 basis points, the largest one-time rate increase since 2000. Higher interest rates make borrowing more expensive and loans less likely, which dampens spending.
Fed Chairman Jerome Powell said Americans can expect more increases this year, but even then he’s not sure it will be enough. If it isn’t, he said, the Fed will ratchet up rates past 2% to 3%.
“We won’t hesitate at all to do that. We won’t,” he told The Wall Street Journal on Tuesday at the publication’s Future of Everything Festival.
Recession fears
After the economy unexpectedly contracted last quarter, more economists predict a recession on the horizon. While the Fed works to tame inflation, economists say the central bank could add fuel to the fire by taking more money out of circulation.
“Recession risks have taken center stage on the carousel of concerns in recent weeks,” Keith Lerner, co-chief investment officer at Truist, said in a note published Friday.
“Historically, the S&P 500 has fallen an average of 29% around recession (median of 24%),” he added. “With the S&P 500 currently showing a peak-totrough decline of almost 19%, the market is effectively already pricing in a 60%-75% chance of recession based on the average and median.”
Global factors
Russia invaded Ukraine in February, which catapulted oil prices to the highest levels since 2014 and lifted prices of fertilizer and metals including aluminum, platinum and nickel. Russia is one of the world’s top producers of all these items. Wheat prices soared because Ukraine and Russia are big wheat exporters. The fighting doesn’t look to end anytime soon.
Then China started locking down cities at the end of March amid new COVID-19 cases. That not only strained production of parts for everything from iPhones to cars, it also delayed shipping as rail, port and trucking workers are locked in.
“The situation in China remains highly uncertain, and more prolonged disruptions would pose upside risk to U.S. inflation in the second and third quarters and downside risk to U.S. growth,” Goldman Sachs wrote in a note last month.
These twin events make the Fed’s job even tougher and make businesses and markets even more nervous. The Fed has some control over demand by raising interest rates, but it can’t control supply, economists said.
Going broke?
Walmart and Target, like a one-two punch on back-to-back days, said that in the face of surging prices, consumers cut their discretionary spending faster than expected.
In April, nominal retail sales jumped 0.9%, which analysts touted as a sign the underlying economy remained strong.
“Despite the surge in prices weighing on their purchasing power, the U.S. consumer now appears to be single-handedly keeping the global economy afloat,” said Paul Ashworth, chief U.S. economist at Capital Economics.
But on Tuesday and Wednesday, Walmart and Target said consumers, particularly lower- and middle-income households, were starting to crack under the weight of inflation.
“Not all of them can afford to absorb this,” Doug McMillon, Walmart president and chief executive officer, said on an earnings conference call.