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Bear Market Hits Wall Street as Stocks, Bonds and Crypto Plunge

NEW YORK — Wall Street fell into what is called a bear market on Monday after fears over a fragile economy and rising interest rates sent the S&P 500 more than 20% below its record set earlier this year.

The index fell 3.9% on investors’ first chance to trade after having the weekend to ponder the startling news that inflation is getting worse, not better. The Dow Jones Industrial Average briefly lost more than 1,000 points before ending with a loss of 876.

At the center of the sell-off was again the Federal Reserve, which is struggling to keep inflation under control. Its main method of doing this is to raise interest rates to slow the economy, a blunt tool that risks a recession if used too aggressively.

With the Fed seemingly compelled to become more aggressive, prices fell in a global rout for everything from bonds to bitcoin, from New York to New Zealand. Some of the steepest declines have been in what had been the big winners of the easier low-rate era, like high-growth tech stocks and other former investor darlings. Tesla fell 7.1% and Amazon 5.5%. GameStop fell 8.4%.

“The best thing people can do is not to panic and sell low,” said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, “and we’re probably not not at the lowest.”

Some economists believe the Fed could raise its key interest rate by three-quarters of a percentage point on Wednesday. That’s triple the usual amount and something the Fed hasn’t done since 1994. Traders now see a 28% chance of such a mega hike, up from just 3% a week ago, according to CME Group.

No one thinks the Fed will stop there, with markets bracing for a continued streak of bigger-than-usual increases. That would come on top of some discouraging signals about the economy and corporate earnings, including a record early reading on consumer sentiment soured by high gasoline prices.

The economy is holding up overall, but the danger is that the labor market and other factors are so hot that they will fuel higher inflation. This is why the Fed is in the midst of a sharp pivot away from the record interest rates it designed earlier in the pandemic, which has supported stocks and other investments in hopes of reviving the economy. .

The sobering realization on Wall Street that inflation is accelerating, not peaking, also sends US bond yields to their highest levels in more than a decade. The two-year Treasury yield climbed to 3.36% from 3.06% late Friday in its second consecutive major move. It had previously hit its highest level since 2007, according to Tradeweb.

The 10-year yield has risen from 3.15% to 3.37%, and the higher level will make mortgages and many other types of loans more expensive. It hit its highest level since 2011.

Higher yields mean bond prices fall, a relatively rare occurrence for them in recent decades. They are also a particularly painful blow for older, more conservative investors who depend on them as the safest parts of their nest egg.

The spread between two-year and 10-year yields also narrowed sharply, a sign of weakening optimism about the economy. When the two-year yield exceeds the 10-year yield, an unusual event, some investors see it as a sign of an impending recession.

Some of the biggest hits have come from cryptocurrencies, which soared at the start of the pandemic as ultra-low rates encouraged some investors to pile into riskier investments. Bitcoin fell more than 14% from the previous day and fell below $23,400, according to Coindesk. It is back to where it was at the end of 2020 and down from a high of $68,990 at the end of last year.

On Wall Street, the S&P 500 fell 151.23 points to 3,749.63 and fell 21.8% below its all-time high set earlier this year to put it in what investors are calling a bear market.

Bears are hibernating, so bears represent a pullback market, said Sam Stovall, chief investment strategist at CFRA. By contrast, Wall Street’s nickname for a booming stock market is a bull market, as the bulls charge, Stovall said.

Them&P 500 lost nearly 9% in just three days. It’s its worst stretch since the early days of the coronavirus crash in March 2020. The Dow Jones lost 876.05, or 2.8%, to 30,516.74 on Monday, and the Nasdaq composite fell 530.80 , or 4.7% to 10,809.23.

The coronavirus crash in early 2020 was Wall Street’s last bear market, and it was an unusually short market that only lasted about a month. Them&P 500 approached a bear market last month, but it did not end a day below the 20% threshold.

Michael Wilson, a strategist at Morgan Stanley who has been among the most pessimistic voices on Wall Street, stands by his view that the S&P 500 could fall further to 3,400 even if the US economy avoids a recession over the next year.

That would mark another drop of about 9% from the current level, and Wilson said it reflects his view that Wall Street’s earnings forecast is still too optimistic, among other things.

Soaring prices are worsening sentiment among shoppers, even those with high incomes, Wilson said in a report that “the next shoe to drop is a discount cycle” as companies try to eliminate accumulated inventory.

Such moves would reduce their profitability, and the price of a stock goes up and down largely on two things: how much cash a company generates and how much an investor will pay for it.

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AP Business Writers Damian J. Troise and Elaine Kurtenbach contributed.

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Post expires at 5:24am on Saturday June 25th, 2022

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