Pre-market stock: The stock market sell-off could have just begun
US stocks are down 23% since hitting a record high on Jan. 3. However, it may have more room to fall—especially if efforts to control runaway prices send the economy into a recession.
“The Fed may be willing to push the economy into recession to control inflation,” Anthony Saglimpin, global market analyst at Ameriprise, told me.
“I think that was probably in the back of investors’ minds, but it’s front and center now. Stocks are going to have a hard time figuring out the end point for the Fed,” he added.
Recessions have not been kind to investors. Bear markets during recessions have historically been longer and deeper than bear markets that weren’t related to recession, notes Sam Stovall, senior investment analyst at CFRA Research. Since World War II, stocks have fallen 28% in bear markets without recessions — and 36% in markets during recessions.
Even analysts who aren’t anticipating such a big drop think stocks have room to fall. Keith Lerner, chief market strategist at Truist Advisory Services, thinks the S&P 500 will fall at around 3,400 — another 7.5% drop from Friday’s close.
“That would make the incredibly brutal market feel this much worse,” said Lerner. “And of course, the markets can go above average.”
Complicating factor: C
eCentral banks cannot rely on the tools they used in previous recessions. Traditionally, the Federal Reserve and other central banks have lowered interest rates and created money to buy government debt to stimulate the economy. But even if inflation moderates in a recession, many factors — commodity prices, fuel costs, and supply chain problems — are beyond their control.
Lowering rates could make inflation worse, canceling out any price moderation we might get from deflation.
The good news, if you can call it that, is that most economists forecasting a recession expect a much shallower contraction than the crash of the early 1980s. Stocks may have been so battered by the end of the year that any sign of moderate inflation or hints that the Fed might ease up on interest rate hikes could lure the market back in.
“One of the best things about stocks right now, given the bleak sentiment, is that some good news can go a long way,” said Trust Lerner, who noted that bear markets tend to be much shorter than bull markets. Several months before the recession ends. Another reason for optimism: In the year after the recession, the stock market returns 40% to investors on average.
China buys large quantities of Russian oil
Despite the West’s efforts to punish the Kremlin for Russia’s invasion of Ukraine, it was unable to stop President Vladimir Putin from selling oil and gas in the country. The taps were kept open and money flowing into Moscow for a variety of reasons – a lack of alternative supplies, high prices, and willing buyers in other parts of the world.
The result: the Russian economy has largely avoided the crisis many in the West had hoped for, despite entering a deep recession.
The Saudis have been the main exporter of oil to China for 19 months in a row. But Russian crude oil prices have been slashed drastically as the country tries to find willing buyers, and it seems that China can’t say no to bargaining over base prices at a time when energy costs are historically high. India is also ramping up its imports of Russian oil.
The European Union has announced that EU companies will be barred from “securing and financing the transportation” of Russian oil to other countries after a six-month transition period, my colleague Julia Horowitz said. This could make it difficult for Russia to find ships willing to load its crude oil.
It may not be quite that simple: EU law would likely push crude oil prices even higher, something that politically vulnerable Western politicians, including US President Joe Biden, don’t care about.
Russia also benefited from higher crude oil prices. If the insurance ban drives up prices, it could partially offset the pain the new rule would cause.
Libyan oil struggles
The conflict in the country has led to some confusing and unreliable reports from the government about oil production. The warring parties have used oil as leverage in their power struggle, my colleague Nadine Ibrahim reports. Competing governments have seized and closed oil facilities several times.
For this reason, the Libyan Oil Ministry said last week that production shrank to a near-stop in June to 100,000 barrels per day, down from 1.2 million barrels per day last year. This week, Oil Minister Mohamed Aoun told CNN that some fields are back online and production has risen to 800,000 barrels per day.
However, this production is still lower than last year and underscores how the Libyan oil sector remains in turmoil. No one is quite sure who is responsible for the country’s crude oil supplies.
The US ambassador to Libya, Richard Norland, said, “There are certain parties that seek to take advantage of the distortion of oil production figures,” describing the Oil Ministry’s figures last week as “inaccurate.”
“The actual production is much higher,” he said.
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