The sell-off in stocks deepened after weak consumer spending data fueled recession fears, with the S&P 500 suffering its worst first half since Richard Nixon’s presidency.
It was a defeat for the history books, with the benchmark falling 21% in the first six months of the year – the most for such a period since 1970. Superlatives continued to pile up on Wall Street, with the yield on 10-year U.S. Treasuries falling to about 3 percent from a decade-high of 3.5 percent in mid-June. The dollar had its best quarter since 2016. Bitcoin’s nearly 60% drop since the end of March was the biggest since the third quarter of 2011.
U.S. consumer spending fell for the first time this year, suggesting the economy is on slightly weaker footing than previously thought amid rapid inflation and Federal Reserve hikes. The prospect that central banks must act quickly because they misjudged inflation rattled markets, with traders increasing bets that the economy will buckle under aggressive tightening.
“The stagflation that has gripped our country right now will make the stock market difficult in the medium term,” said Matt Maley, chief market strategist at Miller Tabak. “When demand isn’t the main reason why inflation is a problem, a slower economy won’t help reduce inflation as much as some experts think.”
Key segments of the world’s largest bond market – such as the spread between five- and 10-year yields – reversed, signaling bets that higher rates would hurt the economy. Inversions have typically preceded recessions by about six to 18 months, according to data compiled by Bloomberg.
After a tough first half of the year, July will be key to the future direction of markets amid corporate earnings, key inflation data and the Fed meeting, according to Greg Marcus, managing director at UBS Private Wealth Management. He says volatility is likely to remain high as long as there is evidence that inflation is slowing, recession risks are receding and geopolitical threats are diminishing.
Over the past few months, a strategy that has worked well for a decade has been met with new market declines. Traders avoid the “buy the dip” mantra while embracing the “sell the rally” mode. As a result, the S&P 500 entered a bear market for the second time since 2020, after falling more than 20% from its peak in January.
But a poor showing is no indication of what’s to come. The benchmark US stock index lost 21% in the first half of the 1970s, during a period of high inflation against which the current environment is compared. It gained 27% in the last six months of the same year.
“We’re going to have double-digit returns between now and the end of the year,” Jonathan Golub, head of U.S. equity strategy at Credit Suisse, told Bloomberg Television. “We don’t have a profit problem as much as people say.”
Earlier this week, strategists at Goldman Sachs Group Inc. noted that U.S. profit margin forecasts were too optimistic, putting stocks at risk of further declines as Wall Street analysts cut their expectations. Morgan Stanley’s Lisa Shalette said Monday that analysts needed a reality check on their earnings forecasts for this quarter.
Elsewhere, oil suffered its first monthly drop since November as OPEC+ completed a recovery in production that was halted during the pandemic. Gold fell for the third month in a row.
What to watch this week:
- Eurozone CPI, Friday
- U.S. Construction Spending, ISM Manufacturing, Friday
Some of the major moves in the markets:
Stock up
- The S&P 500 was down 0.9% as of 4:00 p.m. New York time
- Nasdaq 100 down 1.3%
- Dow Jones Industrial Average fell 0.8%
- MSCI world index fell 1%
Currencies
- The Bloomberg Dollar Spot Index fell 0.4%
- The euro rose 0.4% to $1.0481
- The British pound rose 0.4% to $1.2173
- The Japanese yen rose 0.6% to 135.74 per dollar
Bonds
- The yield on the 10-year note fell seven basis points to 3.02%
- Germany’s 10-year bond yield fell 18 basis points to 1.34%
- UK 10-year bond yields fell 16 basis points to 2.23%
Goods
- West Texas Intermediate crude fell 3.6% to $105.82 a barrel
- Gold futures fell 0.6% to $1,807.30 an ounce
– With the assistance of Andreja Papuk, Denitsa Tsekova, Cecil Goucher, Lu Wang, Elaine Chen, Isabelle Lee, Vildana Heyrich and Enrique Roces.
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