The stock market selloff deepened Monday, putting the S&P 500 on track to close in a bear market, as investors took another look at Friday’s red-hot inflation data and liked it even less.
Faced with rising chances of aggressive monetary tightening by the Federal Reserve, investors broadly unloaded risk and snapped up safer assets. The S&P 500 slumped 3.2%, with most member stocks down on the day, while the yield on the benchmark 10-year U.S. Treasury note rose to 3.350% Monday, from 3.156% Friday.
Meanwhile, a rout in cryptocurrencies highlighted investors’ increasing unwillingness to hang on to their most speculative holdings. The price of bitcoin plunged Monday below $23,000, at one point trading down 67% from its November high.
“We’re definitely seeing a risk-off atmosphere, a flight to quality,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “In that environment, people need to raise cash.”
The declines put the S&P 500 on course to close down at least 20% from its January high, which would send the U.S. stock benchmark into a bear market for the first time since 2020. The Dow Jones Industrial Average fell 2.3%, or about 720 points, while the tech-heavy Nasdaq Composite declined 3.9%.
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Markets have swung wildly this year as investors scramble to decipher how rapidly the central bank will raise interest rates in an attempt to tame sky-high inflation. Rock-bottom rates and other stimulative policies helped keep the economy—as well as markets—afloat as the arrival of the Covid-19 pandemic idled businesses and threw people out of work.
Now, the Fed is trying to tame surging prices by unwinding that easy-money policy. The latest twist came when data Friday showed U.S. consumer prices rose 8.6% year over year in May, the fastest such rise since 1981.
“The very fact that it overshot expectations has really frayed investors’ nerves even more and shown how difficult it is to try to keep a lid on inflation,” said
senior investment and markets analyst at Hargreaves Lansdown. “The worry is that inflation is getting too hot to handle for central banks and they’ll have to dose economies with cold water in the form of tighter policy.”
The Fed will begin its latest two-day policy meeting Tuesday, and most investors believe that the central bank will announce Wednesday it is raising its benchmark interest rate by half a percentage point. But expectations that the Fed will be forced to move even more aggressively this year have risen since Friday’s inflation report.
On Monday, futures bets showed traders assigned a roughly 81% probability that the Fed will raise interest rates by 2.5 percentage points by the end of the year, according to CME Group. That would equate to a half-percentage-point rate increase at every Fed meeting this year. On Friday, traders placed the chances of that at 50%, according to CME Group.
“It seems as though inflation is staying for longer than expected,” said
a multiasset strategist at
“People are now beginning to fear that the Fed will have to go further or faster in terms of interest rates.”
A drop in cryptocurrencies accelerated Monday after interest-rate fears sparked a weekend selloff. Bitcoin, the biggest cryptocurrency, traded at about $23,580 according to CoinDesk—a drop of 16% from 24 hours earlier. Ethereum was down 18% from 24 hours earlier to about $1,244. Shares of
U.S. tech stocks, which soared throughout the pandemic, were set for big declines Monday.
shares were down 2.6%, while
shares lost 4.9%. Chip maker
slid 6.4% and
was down 6.2%.
the parent company of Facebook, lost 4.7%.
As markets react to interest-rate hikes and the threat of a recession, stocks are dropping closer to bear-market territory. WSJ’s Gunjan Banerji explains what it takes to push stocks back into a bull market and why it is hard to predict when they’ll turn around. Illustration: Jacob Reynolds
“This is what you call a bear market, where fear is taking place and pushing people out of the market and having people empty up portfolios and capitulate,” said
the chairman of Los Angeles-based Bel Air Investment Advisors.
Still, Mr. Morgan said developments in the next month or two could help damp inflationary pressures, such as lower gasoline demand after the summer and slowing demand for houses due to rising mortgage rates.
“We’re in a brave new world right now. I don’t think anyone can accurately predict inflation one year from now,”
“China opening up is a big deal, too,” he said, as that would help ease supply-chain constraints. Figures last week showed Chinese exports to the rest of the world surged in May as Covid-19 restrictions eased, adding to signs of economic recovery there.
Expectations of higher rates were on display in the bond market as yields continued to climb after hitting the highest level since November 2018. Bond yields rise as prices fall.
“The picture in the U.S. is probably the best in terms of growth,” said Mr. Ganesh of UBS. “The growth picture in the eurozone isn’t good and whether or not they avoid recession is going to be close.”
Stock indexes in Asia weakened on Monday, with Japan’s Nikkei 225, South Korea’s Kospi Composite and Hong Kong’s Hang Seng all retreating by 2.9% or more.
Eugene Hoshiko/Associated Press
In currency markets, the dollar gained against a range of its peers with the WSJ Dollar Index up 0.7% to 97.41. Higher U.S. interest rates typically boost the value of the dollar.
Stock markets abroad were jolted by fears of tighter U.S. policy and a potential growth slowdown in the world’s biggest economy. The pan-continental Stoxx Europe 600 fell 2.4% to its lowest closing value since March 2021, while the U.K.’s FTSE 100 index fell 1.5%.
Stock indexes in Asia weakened, with Hong Kong’s Hang Seng, Japan’s Nikkei 225 and South Korea’s Kospi Composite all retreating by around 3% or more. In mainland China, the blue-chip CSI 300 index lost about 1.2%.
—Quentin Webb, Dave Sebastian and Megumi Fujikawa contributed to this article.
Corrections & Amplifications
Kiran Ganesh is a multiasset strategist at UBS. An earlier version of this article incorrectly referred to Mr. Ganesh on second reference as Mr. Kiran. (Corrected on June 13)
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