NEW YORK (Reuters) – The benchmark S&P 500 was down more than 20% from its Jan. 3 record closing high on Monday, as investors sold stocks amid worries over whether the Federal Reserve will be able to tame inflation without triggering a recession.
A close of more than 20% below the record high would confirm the index was in a bear market, according to a commonly-used definition. It would be the first time the S&P 500 has confirmed a bear market since the 2020 Wall Street plunge brought on by the COVID-19 pandemic.
STOCKS: The S&P 500 was down 3%.
BONDS: U.S. 10-year Treasury yields hit their highest level since 2011 on Monday and a key part of the yield curve inverted for the first time since April.
FOREX: The U.S. dollar index rose to a fresh four-week high.
KRISTINA HOOPER, CHIEF GLOBAL MARKET STRATEGIST, INVESCO, NEW YORK
“The VIX is up significantly. We maybe kissed 29 on Friday briefly, and it’s still pretty orderly and not terrible at 33, but it’s a big jump up for one day. There is that school of thought that believes we really won’t see capitulation until we hit 40 on the VIX. Now we’ve been higher (than today’s level) this spring, so on the positive side we might be getting a bit closer to capitulation. I’m not a huge technician, and my view is that we won’t really see a turnaround for the stock market until we see some kind of pivot from the Fed. And, by that I mean getting a little less aggressive, which I know is going to take time because right now the trajectory is get more aggressive. But I’m of the belief that we’ve already seen a significant tightening in financial conditions… and so it’s now a question of beat the clock.”
ROB HAWORTH, SENIOR INVESTMENT STRATEGIST, U.S. BANK WEALTH MANAGEMENT, SEATTLE
“This speaks to a market that is looking for Federal Reserve attention and policymaker attention and it is not getting it. That is why we are above 3.25%, I mean, three-and-one-third percent on the 10-year Treasury is a tremendous rate we are talking about now and the market has been selling off. We are seeing this year’s winners get beaten as well today so it speaks to me more of a market looking for attention from policymakers that it is not getting. And the Federal Reserve can’t because it is in its quiet period before Wednesday but also Federal government policy is not focused on this inflation pressure and how to we resolve it at this point and higher taxes generally aren’t going to help. This is a market looking for attention and a resolution and we may not get that until Wednesday.”
“The Fed could do more, that is what is actively being discussed, certainly what we are seeing in the market what is actively being discussed is do they do three-quarters of a point on Wednesday, do they talk about accelerating. How is the Federal Reserve going to get its arms around inflation and keep the economy going? There is just not enough answers. It could be the market is looking for more of a put but they are certainly pricing in an awful lot of rate hikes, they are pricing in a fairly aggressive Federal Reserve here.”
“It is interesting we have oil up on the day, so what had seemed like everyone is capitulating, everyone is rolling over, oil prices are going to fall and nope, oil prices have come back up.”
KING LIP, CHIEF INVESTMENT STRATEGIST, BAKER AVENUE ASSET MANAGEMENT, SAN FRANCISCO
“We see a lot of nervous clients, and you know, being in the business for 25 years, that’s typically the sign of things starting to bottom. But then the reason why the market is not bottoming, we think, is because there still remains a ton of uncertainty. And because of that, it’s likely that it’s going to be extremely choppy here. Even after the Fed, I think if the Fed doesn’t give full clarity of what their intentions are, I think the volatility is going to remain so from that perspective, I think being defensive here is not a bad thing to do.”
“I’m leaning toward the camp of ripping off the band aid, and ripping the band aid means getting aggressive, whether that means 75 basis points or whatever that number is … I do think that the ripping off the band aid approach is the approach that I think the market wants, rather than just sort of wishy-washy, you know, ‘Yeah, maybe we’ll do 50 or maybe we’ll do 75’. This whole ‘maybe’ is what’s really causing a lot of volatility in the markets.”
ROSS MAYFIELD, INVESTMENT STRATEGY ANALYST, BAIRD, LOUISVILLE, KENTUCKY
“The market had been trying to rally around the idea that inflation has peaked, and the Fed would not have to be more aggressive. That story fell apart on Friday with the CPI report, showing broad inflation being entrenched everywhere you look.”
Regarding recent signs of economic slowdown, “it all comes back to a highly aggressive Fed. It’s hard to parse out who’s responsible for what but the Fed has hits fingerprints all over any slowing.”
“I don’t think the Fed will or wants to surprise the market on Wednesday. They have gotten out of the business of causing shocks to the market because of their words or expectations, but for July and onward, 75 bp (interest rate hikes) are back on the table.”
“If they use language like ‘we’ll do whatever is necessary to bring inflation in check,’ to me that will translate to 75 basis point rate hikes.”
On the S&P bear market confirmation: “It’s an important level but a majority of the market was already 20% or more off their highs as of Friday. It’s important, it’s psychologically important, but we’ve been in a bear market for quite some time.”
“To me the story from here is how earnings play out. It makes sense that multiples are contracting. To date, forward earnings have continued to rise. Obviously, there’s been wage and materials inflation, and the extent to which earnings hold up is the most important thing from here.”
(Reporting by Caroline Valetkevitch, Chuck Mikolajczak, Stephen Culp in New York and Noel Randewich in San Francisco)