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Stock market selloff worsens ahead of Fed meeting this week

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U.S. stock markets continued their steep decline on Monday as investment losses continued to mount, creating an economic stranglehold for many Americans who find themselves caught between rising gasoline prices and shrinking savings accounts. ‘investment.

The S&P 500 fell 3.9% on the day, and the tech-heavy Nasdaq composite index fell 4.7%. The Dow Jones industrial average fell about 2.8%. Each of the indexes is down sharply in 2022, and there is no clear indication when the markets might stabilize. Cryptocurrencies also sagged on Monday, with bitcoin losing more than 10% of its value.

The Federal Reserve is due to meet on Tuesday and Wednesday, and it is expected to raise interest rates as it works to rein in inflation. Many analysts had predicted the central bank would raise rates by half a percentage point, but JPMorgan Chase released a research note on Monday speculating that the Fed could act even more aggressively, raising rates by three-quarters of a percentage point. percentage point or more this week. The note hinted that a sense of urgency might be setting in at the Fed.

The Fed campaign is putting immense pressure on the stock market, and there are fears that the US economy could slide into a recession as a result. Stock market sell-offs have in the past led to broader recessionary pressures, forcing households to pull out of things like home improvement projects and travel.

Monday’s decline takes the S&P 500 back into bearish territory, defined as a 20% drop from the most recent high, after briefly touching the benchmark for intraday trading last month. The Nasdaq, meanwhile, is down more than 30% since the start of the year.

Americans face a number of competing economic forces that are raising fears that the country could slide into a recession, even as the unemployment rate remains extremely low and consumers continue to spend. Inflation has persisted much longer than policymakers had initially expected, gaining even more momentum after Russia’s invasion of Ukraine in February. And the stock market, which rebounded strongly from an initial selloff in February and March 2020, lost value during the Fed’s campaign to thwart rising prices.

“The hangover from a higher-than-expected US inflation reading continues to cause scissor pain in markets as it dims hopes that the US Federal Reserve might be able to ease off the rising interest rates,” Chief Investment Officer AJ Bell Russ Mold said in a note Monday.

Econ 101: Why gas prices are so high

Market sell-offs, like the one that swept 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 have to decide whether to sell now and hedge against further downside risk, even though that’s something financial advisors almost always warn about, or whether to stick with it and risk further losses. more important in order to be better positioned for the rebound. Other investors might decide to reduce some of their investments but not others. It is incredibly difficult to time market peaks and troughs.

Empty wallets, empty tanks: Soaring gas prices leave drivers stranded

According to Rod von Lipsey of UBS Private Wealth Management, the term “bear market” is a loosely defined investment benchmark that carries enormous psychological weight. There is no magic number that automatically triggers new sales. But the prospect of losing more than 20 cents on every dollar invested — as indicated by a bear market — can trigger some panic in an investor’s mind, von Lipsey said.

“When we hit that bear market territory, the fear starts feeding on itself,” von Lipsey said in an interview. “This fear of not having enough to retire, enough to meet financial goals, drives people to sell. When fear starts to drive our behavior, it can become a self-fulfilling prophecy in the markets.

The slowdown is expected to last several months, and the market bottom cannot be trusted until the Fed indicates it is almost done with raising interest rates, said Michael Farr of the Farr advisory firm. , Miller and Washington based in Washington. In the meantime, it is worth avoiding the panic, he said.

“Every bear market in US history has passed, and this one will too,” Farr said. “Panic is almost a guarantee of losing. Successful long-term investors suffer during these times and endure.

Markets are wary of whether the Fed can cool 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 on Wednesday after the central bank meeting. She is expected to hike rates by half a percentage point, as she did in May, but the inexorable pace of inflation has some economists worried she may have to act even more. aggressively.

Monday’s losses were widespread, sweeping nearly every sector in a market-wide selloff.

Tech companies that surged during the pandemic fell sharply and their valuations came under pressure. Peloton, considered a work-from-home tech darling, lost 6.37% on Monday, while Amazon fell 5.45%. Apple fell 3.8% and Tesla lost 7.1%.

Travel-related stocks fell, with Norwegian Cruise Lines and Carnival down more than 10%. Manufacturers were not spared either: General Motors lost 7.8%, while Boeing shares fell 8.8%.

Even oil companies – buoyed by soaring oil prices – saw their valuations plummet on Monday. Chevron fell 4.6%, BP 3.8% and ExxonMobil 4.6%.

A rise in interest rates will affect anyone with a home loan, car loan, savings account or money on the stock market. (Video: Daron Taylor/The Washington Post)

Against the backdrop of rising interest rates, worrying signals suggest the US economy may already be in recession, according to Danielle DiMartino Booth, managing director of Dallas-based Quill Intelligence.

Consumer confidence fell to a record low on Friday, according to a widely-watched index from the University of Michigan, while a Washington Post and George Mason University poll found most Americans expect worsening inflation over the coming year. Cracks are also emerging in the labor market as weekly jobless claims – a substitute for layoffs – rose by 8,000 to 215,000, measured as a four-week rolling average.

“The idea of ​​there being a Goldilocks outcome in the cards or a soft landing is a mockery,” DiMartino Booth said. “The only questions that remain,” she added, “are the duration and depth of the current contraction.”

The average rate for a 30-year fixed mortgage reached 5.23%, according to Freddie Mac. A year ago, it hovered around 3%.

World Bank warns global economy could suffer 1970s-style ‘stagflation’

“[Federal Reserve] Chairman Jerome H. Powell and his colleagues are walking a monetary policy tightrope in hopes of averting a recession while dampening demand,” said Bankrate senior analyst Mark Hamrick. “The impact is also visible with the housing market slowing, resulting in the highest mortgage rates in more than a decade.”

This has somewhat cooled the housing market, which is good news for potential buyers. But it also makes mortgages much more expensive; before Fed rate hikes, a $400,000 mortgage would typically result in a monthly payment of about $1,686, excluding taxes and insurance, according to an analysis by Farr, Miller and Washington. With today’s interest rates, that costs $2,398, a 42% increase.

Wall Street has been on a downward spiral throughout 2022 as concerns about inflation and interest rates have been heightened by global events including the war in Ukraine and China’s efforts to eradicate the coronavirus.

Global markets were also plunged into red on Monday, a week after the World Bank warned that moderate growth is expected to persist across the world over the next decade. Hong Kong’s Hang Seng and Japan’s Nikkei each lost more than 3%, while Taiwan’s TSEC 50 fell 2.5%. European stocks also lost ground, with the German DAX down 2.4% and the pan-European Stoxx down 2.4%.

Cryptocurrencies also saw steep declines. Bitcoin has lost more than 12% of its value in the past 24 hours to settle below $24,000, hitting its lowest point since 2020. Bitcoin and other cryptocurrencies have trended higher and go down with the stock market.

Amid the crypto plunge on Sunday night, Celsius, one of the biggest cryptocurrency lenders, said in a blog post that it was suspending all withdrawals, trades and transfers between accounts in a bid to protect its customers. account holders of what he called “extreme market conditions”. ”

The value of all cryptocurrencies has fallen below $1 trillion, according to CoinMarketCap.com, after peaking near $3 trillion in November.

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Post expires at 12:06am on Friday June 24th, 2022

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