NEW YORK (AP) – Wall Street collapsed into what is called a bear market on Monday after fears of a fragile economy and rising interest rates sent the S&P 500 more than 20% below a record set earlier this year.
The index sank 3.9 percent at the first opportunity for investors to trade after the weekend’s reflection on the stunning news that inflation is deteriorating, not improving. The Dow Jones Industrial Average briefly fell more than 1,000 points before ending with a loss of 876.
At the center of the sale was again the Federal Reserve, which is struggling to control inflation. His main method of doing this is to raise interest rates to slow the economy, a dumb tool that risks a recession if used too aggressively.
As the Fed seemed driven by the need to become more aggressive, prices fell in a global collapse for everything from bonds to bitcoins, from New York to New Zealand. Some of the sharpest declines have hit those who were big winners in the easier era with low interest rates, such as high-tech stocks and other former investor favorites. Tesla fell 7.1% and Amazon fell 5.5%. GameStop fell 8.4%.
“The best thing people can do is not panic and sell at the bottom,” said Randy Frederick, managing director of trade and derivatives at the Schwab Center for Financial Research, “and we’re probably not at the bottom. ”
Some economists speculate that the Fed could raise its key interest rate by three-quarters of a percentage point on Wednesday. That’s three times the usual amount, something the Fed hasn’t done since 1994. Traders now see a 28 percent chance of such a mega-increase, up from just 3 percent a week ago, according to the CME Group.
No one thinks the Fed will stop there, as markets prepare for a long series of larger-than-usual increases. They will come on top of some discouraging signals about the economy and corporate profits, including record low preliminary data on consumer sentiment, exacerbated by high gasoline prices.
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In general, the economy is still holding back, but the danger is that the labor market and other factors are so hot that they will lead to higher inflation. That is why the Fed is in the midst of a shock deviation from the record low interest rates it set earlier in the pandemic, which supported stocks and other investments amid hopes of boosting the economy.
Wall Street’s sobering awareness that inflation is accelerating rather than peaking has also sent US bond yields to their highest levels in more than a decade. The yield on two-year bonds rose to 3.36% from 3.06% late on Friday in the second consecutive big move. Earlier, it reached its highest level since 2007, according to Tradeweb.
The 10-year yield jumped to 3.37% from 3.15%, and the higher level will increase the cost of mortgages and many other types of loans. It reached its highest level since 2011.
Higher yields mean that bond prices are falling, which has been relatively rare for them in recent decades. They are also a particularly painful blow to older and more conservative investors, who depend on them as the safer parts of their nest eggs.
The gap between the two-year and 10-year yields has also shrunk sharply, signaling a weakening of economic optimism. When the two-year yield exceeds the 10-year yield, which is unusual, some investors see this as a sign of an impending recession.
Some of the biggest hits came for cryptocurrencies, which rose at the start of the pandemic as ultra-low interest rates encouraged some investors to target the riskiest investments. Bitcoin fell more than 14 percent from a day earlier to $ 23,400, according to Coindesk. It returns to where it was at the end of 2020 and fell from a peak of $ 68,990 at the end of last year.
On the Wall Street, the S&P 500 fell 151.23 points to 3,749.63, down 21.8 percent from a record set earlier this year to put it in what investors call a bear market.
The bears are hibernating, so the bears are a retreating market, said Sam Stoval, chief investment strategist at CFRA. In contrast, Wall Street’s nickname for a growing stock market is a bull market because bulls charge, Stoval said.
The S&P 500 lost nearly 9% in just three days. This is its worst period since the earliest days of the coronavirus crash in March 2020. The Dow lost 876.05, or 2.8%, to 30,516.74 on Monday, and the Nasdaq fell 530.80 , or 4.7% to 9.923%.
The coronavirus collapse in early 2020 was the last bear market on Wall Street and was unusually short, lasting only about a month. The S&P 500 approached the bear market last month, but did not end the day below the 20% threshold.
Michael Wilson, a strategist at Morgan Stanley who is among the more pessimistic voices on Wall Street, is of the opinion that the S&P 500 could fall another 3,400, even if the US economy avoids a recession next year.
That would mean another 9 percent drop from the current level, and Wilson said it reflected his view that Wall Street’s earnings forecasts are still too optimistic, among other things.
With rising prices that are worsening the mood of buyers, even those with higher incomes, Wilson said in a report that “the next shoe to fall is a cycle of discounts” as companies try to clear stockpiles. .
Such moves would reduce their profitability and the share price moves up and down largely from two things: how much money a company generates and how much the investor will pay for it.
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AP business writers Damien J. Trois and Elaine Kurtenbach contributed.
Stan Chow, Associated Press
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