On Friday, the S&P 500 briefly entered a bearish trend Market Zone, a term meaning that the index has fallen at least 20% from its recent high. After recovering slightly on Friday afternoon, the S&P 500 is down less than 19% since the start of the year, its most recent peak.
It was the last bear market during the massive downturn at the start of the coronavirus pandemic. Before the pandemic, the last time the economy experienced a bear market was during the financial crisis more than a decade ago. This bear market lasted for 517 days.
The tech heavy Nasdaq has already been in bear market territory for some time. It has fallen more than 20% from its recent highs in March and is down about 30% from the start of the year.
The Chicago Board Options Exchange Volatility Index, otherwise known as VIX, aims to measure fear in the markets. The index is up more than 92% since the start of the year, a huge jump that illustrates the tremendous concern investors have about the future of the economy.
With the markets turning bearish, alarm bells are flashing red about a recession. Bear markets are not the same as recessions, although they usually precede them.
While a stock market slump doesn’t always portend a recession, the sheer amount of individual wealth that has been wiped out in recent months raises serious concerns, said Desmond Lachman, senior fellow at the American Enterprise Institute.
The stock market accounts for roughly 200% of the country’s GDP, Lachman said, so if the markets fell 20%, 40% of the GDP in wealth would be destroyed.
“So you’re talking about something like $10 trillion has just evaporated, which is a very surprising move because the market has peaked [earlier this year]’So you’re talking about in four months, people are now $10 trillion less wealthy than they were before,'” Washington Examiner. And for this reason, on top of everything else, there is another negative force on the economy.
Many forecasters try to put their thumbs up in determining the chances of a full-blown recession.
The National Bureau of Economic Research, a private academic group, defines a recession as “a significant decline in economic activity that spreads through the economy and lasts more than a few months.” Some see it as two consecutive quarters of negative GDP growth.
GDP declined at an annual rate of 1.4% in the first quarter of this year. If GDP contracts again, that would signal a recession, although a survey of forecasters by the Federal Reserve Bank of Philadelphia found the consensus was that GDP will grow 2.3% annually this quarter.
However, the economy looks much weaker now than it did just three months ago when the same survey forecast 4.2% GDP growth in the second quarter.
The National Association for Business Economics released a survey of forecasters Monday that found 27% of panelists believe a recession will occur in the second half of 2023, while 25% expect a recession either by the end of this year or the first half of next year. public.
Richard Dekasser, Executive Vice President and Chief Corporate Economist at Wells Fargo, told Washington Examiner His company’s economic model predicts a 30% recession in the next six months alone.
Dekasser said that the same forecasting model pegged the odds of a recession in the 5%-10% range at the end of last year and early this year, showing just how much opportunities grow in just a few months.
“It has changed, and there is good reason to be concerned about a variety of dimensions,” he said.
Goldman Sachs expects that there are about 35% chance The economy will go into recession for the next two years.
Behind much of the downturn in the markets is the monetary tightening of the Federal Reserve. After years of loose monetary policy, with interest rates close to zero, the Federal Reserve is now seeking to raise interest rates to crush the inflation that is penalizing the country.
The central bank raised its target interest rate by a quarter of a percentage point in March, then raised rates by half a percentage point earlier this month.
The half-point rise is closer to two simultaneous rate increases and indicates that the Fed is increasingly concerned about the nation’s hyperinflation. The last time the central bank took such a bold approach was more than two decades ago.
Consumer prices rose 8.3% in April on a yearly basis, close to the average level since the early 1980s. The Fed’s main tool for controlling inflation is the federal funds rate, the interbank rate paid for overnight lending, which it plans to increase several times this year.
Raising interest rates is designed to slow spending and thus limit price hikes, although there are concerns that if the Fed moves aggressively in doing so, it will slow the economy too much and cause a recession.
Federal Reserve Chairman Jerome Powell is trying to implement a so-called soft landing where the central bank is able to bring down inflation while preventing recession and increasing unemployment.
Lachman noted that one indication that markets may continue to deteriorate is that the central bank appears to be ruling out “Fed Mode,” which is the belief that the Fed will intervene when the stock market begins to slide by stopping the hiking cycle. or lower interest rates.
Kansas City Fed President Esther George said this week that while the stock market is suffering, that is not surprising and does not change her support for future interest rate hikes.
“I think what we’re looking at is to convey our policy by understanding the markets, and that tightening should be expected,” George said on CNBC. “It’s one of the ways that tighter financial conditions will emerge.”
In general, the current heavy selling in the stock market does not mean that a recession is coming, but it does show that there is a lack of confidence among investors about the future of the economy and that markets are primarily pricing in a recession.
“I don’t think you can have a completely soft landing of the economy at this point,” he said. She said Ethan Harris, head of global economics research at Bank of America Corp. “Either we have a weak economy or a recession.”