- Equities benchmark closes down 22% from January record high
- Prospect of bolder Fed hikes raise concerns on growth outlook
By Vinicius Andrade
June 14, 2022
The S&P 500 Index sank into a bear market on Monday with investors fearing that the Federal Reserve will need to hike interest rates more aggressively to fight inflation, even at the risk of sending the US economy into recession.
The broad equities benchmark closed down 3.9%, with all 11 major industry groups declining more than 2%. The index has now fallen 22% from its Jan. 3 peak, meeting the technical definition of a bear market for the first time since the onset of the pandemic in March 2020.
Big technology companies Apple Inc., Microsoft Corp. and Amazon.com Inc. were the biggest drags on the S&P 500 for the session. Breadth was particularly weak, with just five of the index’s 504 stocks gaining. At one point in the day, every S&P 500 stock was in the red at the same time. The tech-heavy Nasdaq 100 Index ended lower by 4.7%, while the Russell 2000 index plunged 4.8%.
Investors are bracing for the Fed’s interest rate decision on Wednesday, with most economists expecting policy makers to lift borrowing costs by 50 basis points. Some firms including Barclays Plc and Jefferies are projecting a 75-basis-point increase amid a pickup in inflation, with others saying a full-percentage hike cannot be ruled out.
While Fed Chair Jerome Powell “has been clear in his desire to guide expectations rather than surprise expectations, this may be the meeting where we get a bit of a jolt,” said Art Hogan, chief strategist at National Securities. A 75 or 100 basis-point hike “would send a strong message that this Fed is willing to do what needs to be done to get inflation moving in the right direction.”
US inflation unexpectedly accelerated to the highest in 40 years last month, while consumer sentiment plunged in early June.
Economic indicators that arrive later this week will also be key to assessing the state of the economy, since any sharp drops in growth could spur stagflation concerns and further weigh on stocks, according to Tom Essaye, founder of the “Sevens Report” newsletter. The Empire Manufacturing survey is set to be released Wednesday, while the Philadelphia Fed Business Outlook comes out on Thursday.
The MSCI All Country World Index also closed in bear market, falling 21% from its November closing high. As companies grapple with persistently high inflation, upward earnings revisions momentum in the index, which includes stocks in both developed and emerging markets, has declined to 6.7% from its July peak of 48.6%.
According to Goldman Sachs Group Inc. and Morgan Stanley strategists, the risks to economic activity are yet to be fully priced in by equity markets.
“If Wall Street begins to price in much more aggressive Fed tightening, technical selling could drag the S&P 500 towards the 3,500 level,” said Ed Moya, a senior market analyst at Oanda.