On Monday, the S&P 500 closed the day almost 20% down from the record closing high it had hit on January 3rd this year. This confirmed that the benchmark was in the bear market category, with investors selling stocks over concerns about whether the US Federal Reserve would be able to control inflation without dipping the economy into a recession.
The S&P 500 is Officially in Bear Market
According to a definition used widely, an index is said to be in a bear market when it closes below 20% than its record high. This is the first time that the S&P 500 has confirmed a bear market since the Wall Street plunge in 2020 that was brought on by the coronavirus pandemic. Since the beginning of the year, the stock market has shown a lot of volatility, as the markets had taken a beating because of the geopolitical tensions created by the Russian invasion of Ukraine in February this year.
However, most of the recent sell-off is primarily because of the increasing concerns about rising inflation and the monetary policy tightening of the Federal Reserve, as it tries to control it. On Friday, some of the major stock indexes on Wall Street recorded their biggest weekly declines after January. They closed the day lower after data on Friday showed that the CPI in the US had risen more than expected last month.
Market analysts said that a turnaround in the stock market was not likely unless the Federal Reserve changes its policy path. But, it is going to take time for the Fed to become less aggressive.The only good thing is that the more pessimism increases, the higher the potential of upside. The S&P 500 was down by 3.9% on Monday at 3,749.63, which put it 21.8% below 4,796.56, the record high of January 3rd.
The Fed’s Policy
It is expected that the Federal Reserve will hike the interest rate in its policy meeting on Wednesday by about 50 basis points. However, expectations of a hike of 75 basis points have gone up by almost 30%, even though they had been 3.1% last week. The one concern that investors have is that an aggressive policy tightening will increase the chances of the economy going into recession. The downturn the market has seen this year is a major shift after the strong rally it had seen post-pandemic.
There was a 114.38% increase recorded in the S&P 500 from the low it had recorded in 2020 on March 23rdto January 3rd. Market analysts said that the reason the market was bottoming out was because of the uncertainty. The chances of it remaining choppy were likely for the next while. Earlier this year, the Nasdaq Composite had confirmed that it had entered into bear market territory, which made it the first of the three US stock indexes to do so. The Dow has not done so up till now, but it could happen if this uncertainty continues.