A tumultuous week on Wall Street, which began with the sinking of shares in the bear market for the second time during the pandemic, ended with a small profit on Friday. This was little consolation after a brutal period for investors, who saw the value of their portfolios and pension funds fall.
The S&P 500 rose 0.2 percent on Friday, but ended the week with a loss of 5.8 percent, its 10th decline in 11 weeks and its worst weekly performance since March 2020 – when stocks collapsed, as the coronavirus spread around the world and investors feared the global economy.
This time, sales were fueled by persistently high inflation, which undermined people’s purchasing power and deepened corporate profits, and a growing sense that the Federal Reserve’s efforts to beat it with higher interest rates would stifle growth. By making borrowing more expensive to buy a house, invest in a business or do almost anything else with debt, the Fed may cool demand and slow prices, but if it goes too far, it could turn the economy into recession.
Wall Street has been on the brink for months, but the mood has darkened significantly since the government published its last reading of the consumer price index last Friday. He showed that inflation accelerated again in May, as prices rose by 8.6% year on year. Some investors had begun to expect inflation to slow, and the report repulsed them.
By Monday, the panic over the economy was fully realized and shares fell nearly 4 percent, a drop caused in part by news that the Fed was considering making an unusually large increase in interest rates when it met later in the week. Monday’s decline left the S&P 500 down more than 20 percent from its peak in January and the seventh bear market in 50 years.
“It’s all part of a story that’s inflation,” said Aswat Damodaran, a professor of finance at New York University. “Until we figure out where we’re going to get to inflation, you’ll see days up and down that are big.”
On Wednesday, when the central bank raised its interest rate by 0.75 percentage points, the biggest one-time increase since 1994, shares rose. Investors seem to be comforted by Fed Chairman Jerome H. Powell’s assurance that politicians “are not trying to cause a recession.”
The feeling did not continue. Another sharp drop on Thursday, by more than 3 percent, reflects concerns that the more aggressive Fed could actually cause a recession.
Analysts say the turmoil is unlikely to end until investors see signs that inflation has begun to peak – or until the Fed begins to signal the end of its campaign to fight rising prices. This is probably a distant result.
Mr Powell said on Friday that he and his colleagues were “sharply focused on returning inflation to our 2 per cent target”, citing a level that is far below current inflation rates.
Investors – who have turned away from the relief that politicians are taking aggressive action to curb inflation, to fear the impact these actions could have on economic growth – are betting that fluctuations will remain. One measure of this is the VIX volatility index, commonly referred to as the ‘fear index’, as it tracks investor demand for a type of financial instrument that offers protection against market downturns. It has more than doubled in the last year.
Stock sales were wide. Of the 11 company sectors in the S&P 500, 10 are in the red for the year. Only energy companies, as a group, are higher. Their profits are coming as the price of oil and gas skyrocketed, first when people returned to many activities before Covid, and then when Russian energy became untouchable after its invasion of Ukraine.
Stocks are perhaps the most widely understood measure of financial sentiment, but other markets have also been shaken.
Cryptocurrencies, which some believe should act as havens in times of inflation and turmoil, have been in turmoil. Bitcoin lost nearly 30 percent of its value this week alone, falling to its lowest level since 2020. Some of the biggest players in the crypto industry, such as Coinbase, Gemini and Crypto.com, have announced layoffs. Celsius, an experimental crypto bank, abruptly stopped withdrawals.
With cryptocurrencies and stocks, investors may lose a lot more money before things get better.
“There is a lot more pain left,” Mr Damodaran said.
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