Dow sinks 880 points, S&P 500 enters bear market amid global sell-off

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Stocks opened the week sharply lower Monday – with the S&P 500 moving squarely into bear market terrain – as investors agitated over inflation ahead of the Federal Reserve’s meeting.

The S&P 500 had plunged 3.8% by 11 a.m. Eastern time, while the tech–heavy Nasdaq slumped 4.5%. The Dow Jones industrial average sank 870 points, or 2.8%.

The decline puts the S&P 500 back in bear market territory, defined as a 20% fall from the most recent high, after it briefly touched the benchmark in intraday trading last month.

Analysts described the sell-off as yet another ripple effect of disappointing inflation data reported Friday morning and concerns about how the central bank might respond.

Fed officials, who are scheduled to meet Tuesday and Wednesday, have been dialing up interest rates in recent months in an attempt to put a lid on soaring prices.

But inflation reached a new pandemic–era peak of 8.6% on Friday, according to the Bureau of Labor Statistics.

Stocks sold off in tandem, with the Dow losing 2.7%.

“The hangover from a higher than expected US inflation reading is continuing to cause scissoring pain throughout the markets, as it extinguishes the hope the U.S. Federal Reserve might be able to take its foot off the pedal on interest rate rises,” AJ Bell investment director Russ Mould said in a note Monday.

Markets are teetering on whether the Fed can cool down the economy without overdoing it and causing a recession.

The Fed is on track to raise interest rates seven times this year, with the third rate hike expected Wednesday at the conclusion of the central bank’s meeting.

It is expected to raise rates by half a percentage point, as it did in May, but the inexorable pace of inflation has some economists concerned that it will have to act even more aggressively.

Against this backdrop are worrisome economic signals that suggest the U.S. economy may already be in a recession, according to Danielle DiMartino Booth, chief executive at Dallas–based Quill Intelligence.

Consumer sentiment slumped to a record low Friday, according to a widely followed index from the University of Michigan, while a poll from The Washington Post and George Mason University found that most Americans expect inflation to worsen in the coming year.

Cracks also are appearing in the job market as weekly unemployment claims – a stand-in for layoffs – climbed by 8,000 to 215,000, measured as a four–week moving average.

“The idea that there is some Goldilocks outcome in the cards or soft landing is a mockery,” DiMartino said. “… The only questions that remain are the length and depth of the current contraction.”

The impact of the Fed’s actions can also be seen in the bond market and in the rising mortgage rates, said Bankrate senior analyst Mark Hamrick.

The yield on two-year U.S. Treasury bond, at 3.22%, is at its highest point since 2007.

Bond yields move inversely to prices, and increases are a sign that many investors are fleeing to safety.

The average rate for a 30-year fixed mortgage reached 5.09%, according to Freddie Mac. A year ago, it hovered near 3%.

“[Federal Reserve] Chairman Jerome Powell and his colleagues are walking a monetary policy tightrope hoping to avoid a recession while dampening demand,” Hamrick said.

“The impact is also seen with the slowdown in the housing market, resulting from the highest mortgage rates in over a decade.”

Wall Street has been on a downward spiral throughout 2022, as concerns about inflation and interest rates were exacerbated by global events, most notably the war in Ukraine and China’s efforts to stamp out the coronavirus.

The S&P 500 finished down close to 19% year to date at market close on Friday, while the Nasdaq index has erased 28%.

Global markets also were deep in the red Monday, a week after the World Bank warned that subdued growth is likely to persist around the world throughout the next decade.

Hong Kong’s Hang Seng and Japan’s Nikkei each lost more than 3%, while Taiwan’s TSEC 50 fell 2.3%. European stocks lost ground, too, with Germany’s DAX off 2% and the pan–European Stoxx declining 2.2%.

Cryptocurrencies also experienced sharp declines. Bitcoin has lost more than 10% of its value in the past 24 hours to settle below $24,000, reaching its lowest point since 2020.

Bitcoin and other cryptocurrencies have tended to rise and fall with the broader stock market.