The decline puts the S&P 500 back in bear market territory, defined as a 20 percent fall from the most recent high, after it briefly touched the benchmark in intraday trading last month.
Analysts described the sell-off as yet another ripple effect of disappointing inflation data reported Friday morning and concerns about how the central bank might respond.
Americans are dealing with a number of concurrent economic forces that have raised concerns that the country could enter a recession even though the unemployment rate remains extremely low and consumers continue spending. Inflation has persisted much longer than policymakers initially predicted, gaining even more momentum following Russia’s invasion of Ukraine in February. And the stock market, which rebounded sharply from an initial sell-off in February and March of 2020, has shed parts of its value during the Fed’s campaign to thwart rising prices.
“The hangover from a higher than expected US inflation reading is continuing to cause scissoring pain throughout the markets, as it extinguishes the hope the US Federal Reserve might be able to take its foot off the pedal on interest rate rises,” AJ Bell investment director Russ Mould said in a note Monday.
Sustained market sell-offs, like the one washing through the stock market, create a major conundrum for retail investors, many of whom now find themselves staring at 401(k) statements or investment accounts in disbelief. They must decide whether to sell now and protect against further downside risk, even though this is something financial advisers almost always caution against. Or investors must decide whether to stick with it and risk even greater losses so they will be better positioned for the rebound. Other investors might decide to cut some of their investments but not others. Timing the markets peaks and troughs is incredibly difficult.
Markets are teetering on whether the Fed can cool down the economy without overdoing it and causing a recession. The Fed is on track to raise interest rates seven times this year, with the third rate hike expected Wednesday at the conclusion of the central bank’s meeting. It is expected to raise rates by half a percentage point, as it did in May, but the inexorable pace of inflation has some economists concerned that it will have to act even more aggressively.
The losses were broad-based, sweeping up nearly all sectors in a marketwide sell-off.
Tech companies that surged during the pandemic sold off sharply as their valuations have come under pressure; Peloton, considered a work-from-home tech darling, lost 5.9 percent, while Amazon dropped 5.2 percent and Apple declined 2 percent.
Travel-related stocks fell, with Norwegian Cruise Lines and Carnival both down around 10 percent. Manufacturers weren’t spared either: General Motors lost 6.7 percent, while Boeing stock declined 8 percent.
Even oil companies ― bolstered by the run-up in oil prices ― saw their valuations tumble Monday morning. Chevron declined 3.7 percent, BP declined 2.9 percent and ExxonMobil lost 4.1 percent.
Against the backdrop of rising interest rates are worrisome economic signals that suggest the U.S. economy may already be in a recession, according to Danielle DiMartino Booth, chief executive at Dallas-based Quill Intelligence.
Consumer sentiment slumped to a record low Friday, according to a widely followed index from the University of Michigan, while a poll from The Washington Post and George Mason University found that most Americans expect inflation to worsen in the coming year. Cracks also are appearing in the job market as weekly unemployment claims — a stand-in for layoffs — climbed by 8,000 to 215,000, measured as a four-week moving average.
“The idea that there is some Goldilocks outcome in the cards or soft landing is a mockery,” DiMartino said. She added: “The only questions that remain are the length and depth of the current contraction.”
The impact of the Fed’s actions can also be seen in the bond market and in the rising mortgage rates, said Bankrate senior analyst Mark Hamrick. The yield on the two-year U.S. Treasury bond, at 3.22 percent, is at its highest point since 2007. Bond yields move inversely to prices, and increases are a sign that many investors are fleeing to safety.
The average rate for a 30-year fixed mortgage reached 5.09 percent, according to Freddie Mac. A year ago, it hovered near 3 percent.
“[Federal Reserve] Chairman Jerome Powell and his colleagues are walking a monetary policy tightrope hoping to avoid a recession while dampening demand,” Hamrick said. “The impact is also seen with the slowdown in the housing market, resulting from the highest mortgage rates in over a decade.”
Wall Street has been on a downward spiral throughout 2022, as concerns about inflation and interest rates were exacerbated by global events, most notably the war in Ukraine and China’s efforts to stamp out the coronavirus. The S&P 500 finished down close to 19 percent year to date at market close on Friday, while the Nasdaq index has erased 28 percent.
Global markets also were deep in the red Monday, a week after the World Bank warned that subdued growth is likely to persist around the world throughout the next decade. Hong Kong’s Hang Seng and Japan’s Nikkei each lost more than 3 percent, while Taiwan’s TSEC 50 fell 2.3 percent. European stocks lost ground, too, with Germany’s DAX off 2 percent and the Pan-European Stoxx declining 2.2 percent.
Cryptocurrencies also experienced sharp declines. Bitcoin has lost more than 10 percent of its value in the past 24 hours to settle below $24,000, reaching its lowest point since 2020. Bitcoin and other cryptocurrencies have tended to rise and fall with the broader stock market.
Amid the crypto plunge Sunday night, Celsius, one of the largest cryptocurrency lenders, said in a blog post that it is pausing all withdrawals, swaps and transfers between accounts in an attempt to protect its account holders from what it called “extreme market conditions.”
“We are taking this necessary action for the benefit of our entire community in order to stabilize liquidity and operations while we take steps to preserve and protect assets,” the company wrote. “We understand that this news is difficult, but we believe that our decision to pause withdrawals, Swap, and transfers between accounts is the most responsible action we can take to protect our community.”
The value of all cryptocurrencies fell below $1 trillion, according to coinmarketcap.com, down from a November peak of almost $3 trillion.