The S&P 500 has entered a bear market after falling 1.9% in Friday afternoon trading as concerns about interest rate policy tightening grow.
Before the COVID pandemic, the Russian war, and China’s recent economic crisis, the stock market was generally trending upward. All these factors have pushed the stock market in confusing directions, and no one knows when the dip will turn into a crater.
As of today, the S&P has fallen by 20%, putting it into correction territory and inching into the bear market. On Friday afternoon trading hour, the S&P fell by 1.9%, recording the longest series of losses since 2002. Experts believe that the S&P’s recent falls might be an indirect result of the Federal Reserve’s tightening policy. The Federal Reserve stated at one of its meetings that its tightening policy is intended to combat inflation, even if the result is a drop in the S&P indexes.
On the fourth of May, the policymakers increased the central bank’s interest by 50bp. Hours after the announcement, the Wall Street indexes fell. Since then, the market direction has been more down than up, making investors worry about their assets and future gains.
Furthermore, high-value stocks and major corporations delivered disappointing first-quarter results, raising concerns among experts.
As for the S&P, its last bear market was two years ago, in 2020. If you are unfamiliar with the causes of the last bear market, they were the COVID waves and the labor force crisis that hit the world in general.
The COVID impact still hunts the labor market despite the major efforts of the labor department and the White House to fight unemployment. Last week, jobless claims and the unemployment rate came in slightly larger than the two first months of the first quarter. In terms of the market’s supply needs, the U.S market remains in a weak position, especially when the supply chain is hinted at by the Chinese health crisis.
At the moment, the bear market isn’t official, but if that happens and the S&P closes this week’s session with at least 20%, the bear market is official. What investors are really concerned about are high oil prices, inflation, and interest rates.
Based on the recent reports and the expert reading of the market, interest rates are the actual threat. Because what interest rates do is shrink an investor’s stock allocation and give them fewer choices.
As mentioned before, the stock market’s direction isn’t steady at the moment, so there are a few less “safe heaven” assets to consider. Gold has increased but remains below $1900 per ounce. The $2000 ghost still hints at gold, and now the yellow metal appears less attractive to investors.
Our reading of the whole situation is that the U.S. economy faces a complex accumulation of different issues, including political, economic, and health care problems.
The Russian-Ukrainian war caused a fast increase in food, energy, and product prices. The Chinese lockdown caused a tightening supply chain and chip shortage to some extent.
All these complexities can lead to a recession when people can’t buy what they need and some can’t even find a job.
Rising interest rates pose this risk; borrowers will be unable to keep up with the market trend, resulting in economic chaos.