[Editor’s Note: This article was updated after close of market June 10, 2022.]
The bear market is officially here. U.S. stocks plunged on renewed inflation concerns on Monday, ending the bull market that began at the depths of the COVID crash in March 2020. The S&P 500 tumbled as much as 3.9% on Monday, putting it 21.9% below its all-time high set in January.
It’s the second time that the S&P 500 has fallen more than 20% below its highs this year. The last time, on May 20, the index rallied into the green by the end of the day, which was enough to keep the bull market alive temporarily.
Though there is nothing magical about the 20% number, it’s a quick and easy rule of thumb investors use to separate a bull market from a bear market.
In recent history, market downturns that have surpassed 20% on a closing basis have corresponded to deep economic contractions—such as the pandemic in 2020 and the financial crisis in 2007 and 2008—though there is no guarantee that pattern will hold this time around.
Inflation Woes Persist
Investors have been selling stocks all year long because of inflation and rising interest rates, and those were the catalysts for today’s plunge as well.
Last week, the Bureau of Labor Statistics reported that U.S. consumer prices rose by 8.6% year over year in May, faster than expected and the most rapid pace of growth since 1981.
That spooked markets as investors reasoned that the Fed would have to continue hiking rates aggressively to get inflation under control. The Federal Open Market Committee meets this week, and it is widely anticipated that the central bank will hike rates by 50 basis points to a range of 1.25-1.5% on Wednesday.
But with inflation showing no signs of letting up, there are growing fears that the Fed could be forced to raise rates by a massive 75 basis points at its July meeting. The market is also starting to price in a terminal rate somewhere around 4%, well above the 3% level that was the consensus up until recently.
All of this is doing a number on bond ETFs, many of which are hitting new lows for the year today. The iShares Core U.S. Aggregate Bond ETF (AGG) was last trading with a loss of 11.8% for the year, while the iShares 7-10 Year Treasury Bond ETF (IEF) was down 13.2% and the iShares 20+ Year Treasury Bond ETF (TLT) was lower by 25%.
Already In A Bear
Though the S&P 500 is flirting with a bear market, other parts of the stock market have long been embroiled in declines that can only be reasonably characterized as deep bear markets.
The tech-heavy Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100, is down 32% from its highs.
Meanwhile, ETFs that track higher-growth, higher-valuation pockets of the markets are doing much, much worse.
With no end in sight to the spike in interest rates, there’s a growing sense among investors that the Fed is behind the curve and that the central bank has little option but to severely slow the economy to bring inflation under control.
That view is reflected in the Treasury yield curve, where there is only 10 basis points separating the 10- and the two-year yield, and it’s reflected in the price of energy stocks, which are down even though oil prices are trading around multiyear highs.
The Energy Select Sector SPDR Fund (XLE) was last trading down by 4.6%, its third-straight decline.
On the other hand, the fact that commodity prices, including oil, are still holding up and the yield curve hasn’t fully inverted yet suggest the markets haven’t fully bought into the idea that a recession is inevitable.
The good news is unemployment is at rock-bottom levels and consumer spending remains strong despite surging consumer prices.
Bear market or not, the economy is still growing—for now.
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