Wall Street stumbled on Monday, extending last week’s sell-off as investors again began to fuss over inflation and the pace of rate hikes ahead of the Federal Reserve’s annual economic symposium.
The Dow Jones industrial average ended the day at 33,063, down 643 points or 1.9 percent. The broader S&P 500 lost 2.1 percent to close just below 4,138, while the tech-heavy Nasdaq lost 2.5 percent to end trading at 12,381.
The losses follow Friday’s slump, which ended the summer rally that had given the S&P 500 four straight weeks of growth and lifted the lows seen in mid-June. That was when the index hit the bear market — meaning it had lost 20 percent of its value since its most recent peak. Whether the recent losses are temporary or represent a change in price remains to be seen.
“While some bulls may be hoping that the summer rally means the bear market is behind us, it’s important to keep in mind that bear market rallies like this one are not uncommon,” Larkin said.
The stock market is in bear territory. What does that mean?
Monday’s market jitters come as Fed officials prepare to gather in Jackson Hole, Wyo., for their annual economic symposium. Investors are very interested in what Chairman Jerome H. Powell might say on Friday about inflation and any sign that the central bank could change course in its efforts to combat it.
The meeting is separate from the regularly scheduled central bank policy-making meetings, during which the Federal Open Market Committee reviews economic conditions and determines monetary policy, including whether or not to change interest rates.
The steady sell-off of the stock market through much of 2022 is closely tied to the Fed’s campaign to curb red-hot inflation by raising interest rates. Higher rates reduce expenditure, so that theoretically prices do not rise as quickly. To that end, the Fed has raised interest rates four times this year, with three more planned hikes. But the central bank also risks raising interest rates too quickly and sending the economy into recession.
The most recent stock market rally was largely driven by declining inflation, which fell to 8.5 percent last month thanks to falling gas and energy prices. But Powell has indicated that the central bank needs to see durable evidence that prices are under control before changing course.
Investors are now realizing that the Fed has a long way to go before inflation hits the 2 percent target, said Wayne Wicker, chief investment officer of MissionSquare Retirement. That suggests more market volatility is on the way.
“I think we are about to enter a period of turmoil here,” said Brenda Vingiello, chief investment officer of Sand Hill Global Advisors at CNBC. “We need more data to give us an indication of how far the Fed should go.”
On Monday, riskier investments such as meme stocks and cryptocurrencies were hammered, leading to heavy losses for those speculative assets.
Bed Bath & Beyond continued its descent, sliding another 16.2 percent to $9.24. The household goods chain has been in freefall since two major shareholders liquidated their holdings last week, erasing most of the August rally that took it above $25 a share. AMC, another favorite of small investors, fell 42 percent Monday after the owner of Regal Cinemas warned of a possible bankruptcy filing, underscoring the industry’s struggle to pull moviegoers out after the pandemic. Cryptocurrencies also lost value, with bitcoin falling 2.3 percent on Monday.
Ford shares fell 5 percent after the automaker announced plans to cut 3,000 jobs as part of its move to electric vehicles.
Econ 101: What Causes a Recession?
Meanwhile, European markets are questioning whether policymakers can contain inflation without slowing growth too much.
In Europe too, central banks are reining in monetary policy to keep inflation under control, although they are raising interest rates more slowly than their US counterparts. Britain’s central bank recently implemented its largest rate hike since 1995, raising its primary interest rate by 0.5 percent. The European Union increased tariffs by a similar margin.
Analysts believe they are being more cautious, in part because the continent is facing an energy crisis linked to Russia’s invasion of Ukraine and its status as a major supplier of natural gas. The chance of a recession in Europe is greater than in the United States, says chief economist Jeffrey Roach of LPL Financial.
The pan-European Stoxx 600 lost nearly 1 percent on Monday. The German Dax index lost 1.2 percent and the British FTSE 100 fell 0.2 percent.
China, meanwhile, faces another challenge. The country’s ailing economy has seen a marked decline in economic growth, due in part to its “zero covid” policy. A heat wave enveloping much of the country is also forcing a slowdown in factory production there, said Quincy Crosby, chief strategist at LPL Financial.
The country’s central bank is now in a position to cut interest rates to boost economic growth.
Oil prices were largely flat on Monday, with West Texas Intermediate crude trading just above $90 a barrel and Brent oil, the global benchmark, trading below $97.