US stocks tumbled further this week as investors navigated a barrage of bad news.
Central banks around the world are scrambling to combat rising inflation by raising the cost of borrowing without hurting long-term growth prospects. Adding to the uncertainty and fear are rising tensions between the West and Russia following Moscow’s invasion of Ukraine.
In the US, the S&P 500 — an indicator of the health of retirement and college savings accounts — fell to its lowest level in nearly two years this week and was set for a monthly decline of nearly 8 percent.
The tech-heavy Nasdaq 100 is down nearly 33 percent so far in 2022, the Dow Jones Industrial Average is down more than 20 percent, while the world’s best-known cryptocurrency, Bitcoin, has lost nearly 60 percent of its value. Home prices are also falling as interest rates soar, making borrowing more expensive for potential buyers.
Tasked with fighting the highest inflation in decades, the Federal Reserve, the country’s central bank, is doing so by raising interest rates. But can it raise the cost of capital to lower demand and lower prices without plunging the economy into a deep recession?
“At this point it’s really a no-win situation. Mainly because of the many shocks that policymakers have had to contend with,” Cristian deRitis, lead economist at Moody’s, a New York-based research firm, told Al Jazeera.
How Much Further Down Can Stocks Go? What exactly is a bear market? And is there a light at the end of the tunnel?
Here’s the short answer.
I keep hearing that the US is in a bear market. What is that exactly?
A bear market occurs when a broad market index falls more than 20 percent from recent highs.
Why is the US currently in a bear market?
“Continued concerns about inflation and the Fed’s ability to tame prices without a hard landing,” said Peter Essele, head of portfolio management at Commonwealth Financial Network, a Massachusetts-based firm.
What is the cause of high inflation and why are prices spiraling out of control?
Kenneth McLaughlin, an economics professor at Hunter College in New York, told Al Jazeera that one of the reasons the federal government is injecting “$5 trillion into the economy, including through stimulus checks during the pandemic, with good intentions, but with no payment plans for it.”
In other words?
Think back to early 2020, when businesses shut down and economies stalled to stem the spread of the coronavirus. Millions of Americans were in lockdown with nowhere to go and hand out the hot-off the press stimulus checks. That caused stock prices, be it equities, bitcoin and home prices in the US, to soar. It also caused an increase in the demand for goods, which, as we see today, has resulted in the largest increase in the cost of living in decades.
The war in Ukraine and rising tensions between the West and Russia are expected to continue to spook investors and roil markets [File: Brendan McDermid/Reuters]
How is this causing the stock market to go down?
As the Fed hikes interest rates, essentially raising the cost of borrowing to drive down the prices of goods and services, people are beginning to fear a slowdown in the economy. This depresses the price of stocks and other investments.
Are the current economic conditions really just the result of what has happened in the last 2 years?
The past two years have been unprecedented in many ways. But what we’re seeing today can also be attributed to the extremely low interest rates of the last decade, when the government made it cheaper for Americans to borrow in the wake of the 2007-2008 financial crisis, Essele told Al Jazeera.
Didn’t the markets just rally?
Stocks rallied in August. It rallied as gasoline prices, which had risen sharply in previous months, fell sharply. Investors hung on to hopes that the Fed might ease rate hikes if August inflation numbers showed that consumer prices had cooled. But despite cheaper petrol, food and other essentials, prices remained high – up 8.3 percent in August from a year earlier.
Where are we now?
“Inflation is becoming more structural and investors are now concerned about stagflation,” Essele told Al Jazeera, hinting that price increases could persist over the long term. Stagflation is a mashup of the words “inflation” and “stagnation” and refers to a situation where inflation is high even though economic growth is slowing.
So what does the future bring? And how long will this bear market last?
Expect above-average price pressure. The war in Ukraine and rising tensions between the West and Russia are adding to the uncertainty and will continue to unsettle investors and roil markets.
“But we’re probably three quarters of the way through the bear market,” Essele predicted.
I don’t own stocks, why should I care about a bear market?
While equity investors are most immediately affected by a bear market in the US, there are spillover effects to the rest of the economy, largely due to the “wealth effect”. This means that when households see the value of their bond and stock portfolios falling, they will cut back on spending.
“Given the US economy’s reliance on consumer spending, these impacts can be significant and far-reaching,” Moody’s deRitis told Al Jazeera. “Discretionary sectors like travel, leisure and hospitality could feel the most immediate impact, but other industries like housing and retail will see lower demand as households become more cautious.”