The losses follow Friday’s pullback, which broke up the summer rally that had given the S&P 500 four straight weeks of gains and lifted it from its mid-June lows. That’s when the index crossed into a bear market – meaning it had lost 20 percent of its value since its last peak. Whether recent losses are temporary or represent a change in direction remains to be seen.
“While some bulls may be hoping that the summer rally means the bear market is behind us, it’s important to remember that bear market rallies like this are not uncommon,” Larkin said.
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Monday’s market turmoil comes as Fed officials prepare to gather in Jackson Hole, Wyo., for their annual economic symposium. Investors are keenly interested in what Chairman Jerome H. Powell may have to say about inflation on Friday and any signs that the central bank may change course in its efforts to combat it.
The gathering is separate from the central bank’s regular policymaking meetings, where the Federal Open Market Committee assesses economic conditions and decides monetary policy, including whether to change interest rates.
The stock market’s steady sell-off through much of 2022 has been closely linked to the Fed’s campaign to rein in red-hot inflation by raising interest rates. Higher prices reduce spending, which theoretically prevents prices from rising as quickly. The Fed has raised interest rates four times this year for this, with three more increases planned. But the central bank also risks raising interest rates too quickly and tipping the economy into recession.
The recent stock market rally was largely driven by subdued inflation, which moderated to 8.5 percent last month thanks to falling gas and energy prices. But Powell has indicated that the central bank needs to see sustained evidence that prices are under control before changing course.
Investors now realize the Fed still has a long way to go before it gets inflation down to its 2 percent target, said Wayne Wicker, chief investment officer at MissionSquare Retirement. That suggests more market volatility could be on the way.
“I think we’re about to enter a period of turmoil here,” Sand Hill Global Advisors chief investment officer Brenda Vingiello said on CNBC. “We need more data to give us more of an indication of how far the Fed needs to go.”
On Monday, riskier investments like meme stocks and cryptocurrencies were hammered, leading to heavy losses for these speculative assets.
Bed Bath & Beyond continued its decline, falling another 16.2 percent to $9.24. The household chain has been in freefall since two major shareholders liquidated their holdings last week, erasing most of the August rally that brought it above $25 a share. AMC, another favorite among small investors, sank 42 percent on Monday after the owner of Regal Cinemas warned of a potential bankruptcy filing, underscoring the sector’s struggle to draw moviegoers back after the pandemic. Cryptocurrencies also lost value, with bitcoin falling 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 teetering on whether policymakers can control inflation without slowing growth too much.
In Europe too, the central banks are reining in monetary policy to get inflation under control, although they are increasing interest rates at a slower pace than their American counterparts. Britain’s central bank recently delivered its biggest interest rate hike since 1995, raising the prime rate by 0.5 percent. The European Union raised interest rates by a similar margin.
Analysts believe they are moving more cautiously, in part because the continent is facing an energy crisis linked to Russia’s invasion of Ukraine and its status as a major supplier of natural gas. The odds of a recession are greater in Europe than in the US, said LPL Financial’s chief economist Jeffrey Roach.
The pan-European Stoxx 600 lost almost 1 percent on Monday. Germany’s Dax index lost 1.2 percent, and Britain’s FTSE 100 fell 0.2 percent.
China faces another challenge. The country’s ailing economy has seen a marked slowdown in economic growth, partly as a result of its “zero covid” policy. A heat wave enveloping a good part of the country is also forcing a decline in factory production there, said LPL Financial’s global strategist Quincy Crosby.
The country’s central bank is now able to lower 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.