A tumultuous week on Wall Street that began with stocks plunging into a bear market for the second time during the pandemic ended with a small gain on Friday. That was little comfort after a brutal period for investors, who saw the value of their portfolios and retirement funds plummet.
The S&P 500 rose 0.2 percent on Friday but ended the week with a 5.8 percent loss, its 10th decline in 11 weeks and its worst weekly performance since March 2020 – when stocks tumbled at As the coronavirus spread across the world and investors feared for the world economy.
This time, the sale was fueled by persistently high inflation, which erodes people’s purchasing power and hurts corporate profits, and a growing sense that the Federal Reserve’s efforts to recoup it with higher interest rates will stifle growth. growth. By making it more expensive to borrow money to buy a home, invest in a business or do anything else with debt, the Fed can cool demand and dampen price gains, but if it goes too far, it could tip the economy into a recession.
Wall Street has been on edge for months, but the mood has darkened considerably after the government released its latest Consumer Price Index reading last Friday. It showed inflation accelerating again in May, with prices rising at an annual pace of 8.6%. Some investors began to expect inflation to slow, and the report took them out of that view.
On Monday, panic over the economy was on full display, and stocks tumbled nearly 4 percent, a drop fueled in part by news that the Fed was considering making an unusual rate hike when it meets later in the week. . Monday’s plunge left the S&P 500 down more than 20 percent from its January peak and in its seventh bear market in 50 years.
“It’s all part of a story, which is inflation,” said Aswath Damodaran, a finance professor at New York University. “Until we have an idea of where we’re going to end up in inflation, you’re going to see bull days and bear days that are big.”
On Wednesday, when the central bank raised its benchmark interest rate by 0.75 percentage points, the biggest one-off increase since 1994, stocks rose. Investors seemed to take solace in Fed Chairman Jerome H. Powell’s assurance that policymakers “were not trying to induce a recession.”
The sensation didn’t last. Another sharp decline on Thursday of more than 3 percent reflected concerns that a more aggressive Fed could, in fact, induce a recession.
Analysts say the turmoil is unlikely to end until investors see signs that inflation has started to peak – or until the Fed begins to signal the end of its campaign to fight rising prices. This is probably a distant result.
On Friday, Powell said he and his colleagues were “extremely focused on returning inflation to our 2 percent target,” citing a level far below current inflation rates.
Investors – who have shied away from relief that policymakers are taking aggressive steps to curb inflation for fear of the effect such actions could have on economic growth – are betting the swings are here to stay. One measure of this is the VIX volatility index, commonly called the “fear index” because it tracks investor demand for a type of financial instrument that offers protection against market downturns. More than doubled in the past year.
Stock sales have been widespread. Of the company’s 11 sectors in the S&P 500, 10 are in the red for the year. Only energy companies as a group are higher. Its gains came as the price of oil and gas soared, first as people returned to many pre-Covid activities and later as Russian energy became untouchable after the invasion of Ukraine.
Stocks are perhaps the most widely understood measure of financial mood, but other markets have been shaken as well.
Cryptocurrencies, which some believe should act as havens in times of inflation and turmoil, have been through a torrid moment. Bitcoin has lost nearly 30% of its value this week alone, dropping to its lowest level since 2020. Some of the biggest players in the cryptocurrency industry such as Coinbase, Gemini and Crypto.com have announced layoffs. Celsius, an experimental cryptocurrency bank, abruptly stopped withdrawals.
With cryptocurrencies and stocks, it is possible for investors to lose a lot more money before things get better.
“There’s a lot more pain left,” Damodaran said.