The S&P 500 closed down 151 points, or 3.88%, meaning it’s down 21.3% since its high on Jan. 3. The Dow was down 876 points (2.79%) and the Nasdaq dropped 530 points (4.68%).
On Friday, investors were disappointed to learn that inflation is moving in the wrong direction. U.S. consumer prices surged 8.6% year-over-year in May, to a fresh 40-year high, led by higher prices for energy, food and housing. For the first time in history, a gallon of regular gas now costs $5 on average nationwide, according to AAA, and experts predict gas prices could average $6 a gallon by August.
“Any talk that we are at peak inflation has to be tabled at least until prices stop rising,” said David Nelson, chief strategist at Belpointe Asset Management.
The worse-than-expected inflation report has investors raising their bets on more aggressive interest rate increases from the Federal Reserve, possibly as soon as the central bank’s policy-setting meeting this week.
According to the CME FedWatch Tool, there is now about a 25% chance that the Fed will raise short-term interest rates by three-quarters of a point at the end of Wednesday’s policy meeting as the Fed ratchets up its fight against high inflation.
The likelihood of a half point rate hike at the Fed’s September meeting has now jumped to 50%, up from 25% before Friday’s inflation report.
“The debate continues over whether the Fed can slow inflation using its many monetary policy tools without pushing the economy into a recession,” Art Hogan, chief market strategist at National Securities, told ABC News. “Raising rates by three-quarters or even one percentage point on Wednesday would send a strong message that this Fed is willing to do what needs to be done to get inflation moving in the right direction.”
Inflation fears have sparked a broad-based selloff on Wall Street that has spread beyond stocks to the bond market and cryptocurrencies. Bitcoin, the biggest cryptocurrency, traded below $24,000, down nearly 14% in just 24 hours.
Despite this year’s rapid stock market selloff, strategists at Morgan Stanley and Goldman Sachs said the market does not fully reflect the risks facing the economy.
“The Equity Risk Premium does not reflect the risks to growth, which are increasing due to margin pressure and weaker demand as the consumer decides to hunker down,” Morgan Stanley strategists, led by Michael Wilson, wrote in a note on Monday.
If the S&P 500 closes Monday’s trading session with a decline of more than 1.3%, the index would be in a bear market, defined as a 20% drop from a recent high. The technology-heavy Nasdaq-100 slipped into a bear market in March.