Wall Street entered a bear market Monday as the S&P 500 sank 3.9%, bringing it more than 20% below the record high it set in January.
Fears about a fragile economy and stubbornly high inflation have slammed the stock market in recent days and sent Treasury yields surging to their highest levels in years.
A report last week that inflation was getting worse, not better as many had hoped, sent a chill through markets that carried over into this week.
Investors expect the Federal Reserve will get more aggressive to get inflation under control, even if it risks a recession.
Speculation is building that the Fed later this week may raise its key short-term interest rate by three-quarters of a percentage point. That’s triple the usual amount and something the Fed hasn’t done since 1994. Traders now see a 30% probability 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 series of bigger-than-usual hikes. Those would come on top of some already discouraging signals about the economy and corporate profits, including a record-low preliminary reading on consumer sentiment that was soured by high gasoline prices.
It’s all a whiplash turnaround from earlier in the pandemic, when central banks worldwide slashed rates to record lows and made other moves that propped up prices for stocks in hopes of juicing the economy.
Such expectations are also sending US bond yields to their highest levels in years. The two-year Treasury yield shot to 3.23% from 3.06% late Friday, its second straight major move up. It’s more than quadrupled this year and touched its highest level since 2008.
The 10-year yield jumped to 3.29% from 3.15%, and the higher level will make mortgages and many other kinds of loans for households and for businesses more expensive.
The pain was felt worldwide as investors braced for more aggressive moves from a coterie of central banks.
In Asia, indexes fell at least 3% in Seoul, Tokyo and Hong Kong. Stocks there were also hurt by worries about COVID-19 infections in China, which could push authorities to resume tough, business-slowing restrictions.
In Europe, Germany’s DAX lost 2.6%, and the French CAC 40 fell 2.9%. The FTSE 100 in London dropped 1.8%.
Some of the biggest hits came for cryptocurrencies, which soared early in the pandemic when record-low interest rates invite investors to bid up the riskiest investments. Bitcoin tumbled more than 15% and dropped below $23,254, according to Coindesk. It’s back to where it was in late 2020 and down from a peak of $68,990 late last year.
The last bear market wasn’t that long ago, in 2020, but it was an unusually short one that lasted only about a month.
This would also be the first bear market for many novice investors who got into stock trading for the first time after the pandemic, a period when stocks largely seemed to go only up — until inflation showed itself to be worse than just a “transitory” problem as portrayed.