Dow Jones drops more than 600 points as investors worry about Fed’s next move
The losses come after Friday’s pullback, which broke the summer rush that gave the S&P 500 four straight weeks of growth and lifted it from its mid-June lows. That’s when the index entered a bear market – which means it has lost 20 percent of its value since its last peak. It remains to be seen if the recent losses are temporary or represent a change in trend.
“Although some bulls may hope that the summer rally means that the bear market is behind us, it is important to keep in mind that bear market rallies like this are not uncommon,” Larkin said.
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Monday’s market jitters come as Federal Reserve officials prepare to meet in Jackson Hole, Wyoming, for their annual economic seminar. Investors are keenly interested in what President Jerome Powell might say about inflation on Friday and any indication that the central bank may change course in its efforts to combat it.
The gathering is separate from the central bank’s regularly scheduled policy-making meetings, during which the Federal Open Market Committee assesses economic conditions and determines monetary policy, including whether interest rates should be changed.
The steady sell-off in the stock market through most of 2022 was closely linked to the Fed’s campaign to rein in severe inflation by raising interest rates. Higher rates reduce spending, which in theory keeps prices from rising quickly. The Fed has raised interest rates four times this year to that end, with three more increases planned. But the central bank also risks raising interest rates too quickly and pushing the economy into recession.
The recent rally in the stock market was driven in large part by weak inflation, which fell to 8.5 percent last month thanks to lower gas and energy prices. But Powell noted that the central bank should see solid evidence that prices are under control before they change course.
Wayne Wicker, chief investment officer at MissionSquare Retirement, said investors now realize the Fed still has a long way to go before inflation drops to its 2 per cent target. This indicates that more market volatility may be on the way.
“I think we’re about to enter a period of volatility here,” Brenda Vengelo, chief investment officer at Sand Hill Global Advisors, said on CNBC. “We need more data to give us more indication of how far the Fed needs to go.”
On Monday, high-risk investments such as meme stocks and cryptocurrencies were hit hard, leading to huge losses for those speculative assets.
Bed Bath & Beyond extended its slide, dropping an additional 16.2 percent, to $9.24. The home appliance chain has been in free fall since two major shareholders liquidated their holdings last week, erasing most of the August rally that brought it above $25 per share. AMC, another favorite of small investors, sank 42 percent Monday after owner Regal Cinemas warned of a possible bankruptcy filing, highlighting the sector’s struggle to get moviegoers back in after the pandemic. Cryptocurrencies have also lost value, with bitcoin dropping 2.3 percent on Monday.
Ford shares fell 5 percent after the automaker announced plans to cut 3,000 jobs as part of its transition to electric vehicles.
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Meanwhile, European markets are also swinging over whether policy makers can control inflation without slowing growth too much.
In Europe, too, central banks are reining in monetary policy to control inflation, although they are raising interest rates at a slower pace than their US counterparts. The Bank of England recently achieved the largest interest rate increase since 1995, raising the policy rate by 0.5%. The European Union raised interest rates by a similar margin.
Analysts believe they are moving with more caution, in part because the continent faces an energy crisis linked to Russia’s invasion of Ukraine and its status as a major supplier of natural gas. LBL Chief Financial Economist Jeffrey Roach said the prospects of a recession are greater in Europe than in the United States.
The pan-European Stoxx 600 lost nearly 1 percent on Monday. Germany’s DAX lost 1.2 percent, Britain’s FTSE fell 0.2 percent.
Meanwhile, China faces a different challenge. The country’s faltering economy has seen a marked decline in economic growth, caused in part by the “zero Covid” policy. Quincy Crosby, chief global strategist at LPL Financial, said the heat wave that is enveloping much of the country is also slowing factory production there.
The country’s central bank is now in a position to cut interest rates to stimulate economic growth.
Oil prices were largely flat on Monday, with West Texas Intermediate crude trading just above $90 a barrel and Brent crude, the global benchmark, trading below $97.