Damien J. Trois and Stan Choi
New York (AFP) – The stock market bounced back from Friday’s midday low after hitting the brink of its first bear market since the pandemic began. The S&P 500 finished 18.6% below the record high set in early January.
The 20% drop could have been considered the start of a bear market. The benchmark index, the heart of many retirement accounts, returned from a 2.3% loss to barely finish in the green.
High interest rates, high inflation, the war in Ukraine and a slowing Chinese economy have worried investors. The Dow Jones erased a 600-point drop.
High interest rates, high inflation, the war in Ukraine and a slowing Chinese economy are all punishing stocks and heightening fears about a possible recession in the United States. Adding to concerns is how the superhero who flew to save Wall Street in recent downturns, the Federal Reserve, appears less likely to help as it is stuck fighting the worst inflation in decades.
How did it happen so quickly?:The S&P 500 fell from a record high to nearly a 5-month bear market
stock to buy:How to invest in a bear market as the S&P 500 is slightly above the bottom line
Inflation harms consumers
With inflation at its highest level in four decades, the Fed has moved aggressively away from keeping interest rates very low in order to support markets and the economy. Instead, it raises interest rates and takes other steps in hopes of slowing the economy enough to curb inflation. The worry is if it goes too far or too fast.
Powell on puffing:Powell says the Fed will keep raising rates until it curbs inflation
Putting your money to work:As prices rise, inflation rises and stocks fall
“The market volatility has certainly been driven by investor fears that the Fed will tighten policy too much and put the US into a recession,” said Michael Aaron, chief investment analyst at State Street Global Advisors.
Bond yields fell as recession fears pushed investors to Treasurys and other things seen as safer. The yield on the 10-year Treasury, which helps determine mortgage rates, fell to 2.78% from 2.85% late Thursday.
Inflation has been painfully high for months. But market fears swung higher after the Russian invasion of Ukraine sent prices up at grocery stores and at petrol pumps, because the region is a major source of energy and grain.
Meanwhile, the world’s second-largest economy took a hit as Chinese officials closed major cities in the hope of halting coronavirus cases. This is all compounded by some disappointing data from the US economy, although the labor market remains hot.
Retail stocks suffer
The increased pressure on stocks were signs that corporate earnings are slowing and may finally be hurt by inflation. Both retail giants Target and Walmart had warnings this week about lowering inflation. Retailer Ross Stores fell nearly 23% on Friday after cutting its earnings forecast, citing rising inflation as a factor.
Why did the target stock drop?:Thanks to high gas prices and inflation
Coles:Kohl’s Corp first-quarter sales fell 5.2% as the retailer looks at potential buyers
“The latest retail earnings finally indicated that US consumers and businesses are being negatively impacted by inflation,” Aaron said.
Although its source varies, the gloom on Wall Street reflects a sense of discontent across the country. A poll from the Associated Press-NORC Center for Public Research released Friday showed that only about 2 in 10 adults say the US is heading in the right direction or the economy is doing well, both down from about 3 in 10 a month ago.
Much of the Wall Street bull market since early 2020 has been the result of buying by casual investors, many of whom started trading for the first time during the peak period. Along with many cryptocurrencies, they’ve helped push dear ones like Tesla’s stock higher. They even made GameStop suddenly rise to such a high level that it sent panic in professional Wall Street.
But these traders, called “retail investors” by Wall Street to distinguish them from large institutional investors, are holding back as stocks tumble. Retail investors have switched from net buyers of stocks to net sellers over the past six months, according to a recent report from Goldman Sachs.
Robinhood Markets, whose easy-to-use trading app has helped attract millions of new investors, has seen its massive revenue growth reverse amid fewer trades by nervous clients, particularly those with smaller balances.