Chicago economy

Stocks slip back into bearish territory amid recession fears

Shares pfell back into bearish territory on Monday amid growing fears that a recession or stagflation looms on the horizon.

The S&P 500 fell 2.4% to enter a bear market. A bear market is when an index falls below 20% from a recent high. The S&P 500 has fallen 20.6% year-to-date, its most recent peak.

The Chicago Board Options Exchange Volatility Index is intended to measure fear in the markets. The index has risen more than 83% since the start of the year, a huge jump that shows the extreme concern among investors about the future of the economy.

Stocks had already entered a bear market last month, but managed to recoup some of those losses before falling back into the red on Monday.

NEW HOME SALES FALL TO PRE-PANDEMIC LEVELS

The last sustained bear market was a short period at the start of the coronavirus pandemic. Before the pandemic, the last time the economy experienced a bear market was during the financial crisis more than a decade ago, which lasted 517 days.

A key factor in the stock market rout is the Federal Reserve’s monetary tightening. After years of loose monetary policy, with interest rates close to zero, the Fed is now scrambling to raise rates quickly in an effort to crush the country’s runaway inflation.

Consumer prices rose 8.6% in May on an annual basis, the highest rate of inflation since the early 1980s. The Fed has indicated that it plans to raise interest rates to several times this year, which could mean that the bear market will have some resistance. The inflation report came in hotter than expected and caused heightened market anxiety on Friday and Monday.

The central bank raised its interest rate target by a quarter of a percentage point in March and then raised rates by half a percentage point earlier this month.

The half-point hike is analogous to two simultaneous rate hikes and shows that the central bank is increasingly concerned about inflation. The last time the Fed made such an aggressive move was more than two decades ago.

By raising interest rates, the Fed hopes to slow spending. Some market watchers worry that because the Fed is now acting so aggressively, it is slowing the economy too much and causing a recession.

Some investors expect that if the stock market drops too sharply the Fed will step in and suspend its rate hike cycle or even cut rates, although given historical levels of inflation it looks like the bank Central has no intention of doing so, even if it means stocks will continue to crater.

Federal Reserve Bank of Kansas City President Esther George recently signaled that the Fed’s leadership would not be deflected by falling stock markets.

“I think what we are looking for is the transmission of our policy through understanding the markets, and that tightening is to be expected,” she said. “This is one of the routes through which tighter financial conditions will emerge.”

Stagflation is also a concern. Stagflation, a portmanteau of stagnation and inflation, occurs when inflation rises at the same time that economic growth and the labor market are struggling.

The term is often used to describe the US economy of the 1970s, when inflation and unemployment were high. At the time, many top economists believed that such a situation was impossible because it was believed that high inflation could be traded for lower unemployment.

Bear markets and stock sell-offs don’t necessarily indicate a recession, but they often go together.

The National Bureau of Economic Research, a private academic group, defines a recession as “a significant decline in economic activity that spreads throughout the economy and lasts for more than a few months.”

With gross domestic product declining at an annual rate of 1.4% in the first quarter of this year, most forecasters expect positive growth in the second quarter, a reassuring prediction for those fearful of a recession.

Still, many economists think a recession could be imminent.

Goldman Sachs assigns a 35% chance of a recession in the next two years, while Wells Fargo’s economic model predicts a 30% chance of a recession occurring in the next six months alone.

CLICK HERE TO LEARN MORE ABOUT THE WASHINGTON EXAMINER

As the Fed continues to raise interest rates, all eyes will be on the stock market to see what happens next. Top Fed officials are due to meet in June and July, and many investors are anticipating more aggressive half-point hikes following those rallies.