The S&P 500 remains on the precipice of a bear market — defined as falling 20 percent from a recent high — having dipped into that terrain Friday before squeaking out a last-minute recovery. The tech-heavy Nasdaq is already down more than 27 percent for the year, and the Dow is off nearly 14 percent.
Markets loathe uncertainty, but 2022 trading has been mired in it as investors try to parse a complex, competing array of forces weighing on the global economy, from decades-high inflation to the evolving consequences of the pandemic and the war in Ukraine.
Investors appear to lack confidence the Federal Reserve can tame roaring inflation without tipping the economy — which is already slowing amid a wide range of head winds — into a recession. Soaring costs are cutting into businesses’ profits and forcing households to spend more at the gas pump and grocery stores. Last week, Treasury Secretary Janet L. Yellen warned that “higher food and energy prices are having stagflationary effects … depressing output and spending and raising inflation all around the world.”
The Fed’s interest rate hike earlier this month — the second of seven forecast for 2022 — could make borrowing more expensive for corporations and households. This is supposed to ease inflationary pressures. But Fed officials are attempting to raise interest rates at such a pace that it doesn’t completely smother economic growth, a difficult balance to strike. If the economy cools too quickly, it could fall into a recession, generally defined as two consecutive quarters of decline.
Russ Mould, investment director at AJ Bell, said that he says he sees the “classic” phases of a bear market forming as investors come to grips with the onslaught of challenges to the growth stocks have enjoyed since the short but significant downturn they suffered when the coronavirus first brought the global economy to a halt. Pandemic favorites have seen their shares tumble in 2022, including Microsoft (down 25 percent) Amazon (36 percent), Peloton (58 percent), Netflix (68 percent) and Zoom (53 percent).
Bull markets “crack at the periphery first,” Mould noted in commentary Monday. “Trouble then filters through to core assets as confidence wanes.”
These cracks have been forming for a while now, their influence impossible to ignore in more speculative areas of the market such as cryptocurrency, Mould noted, pointing to Bitcoin’s stunning fall. The digital coin is trading below $30,000, down 36 percent year-to-date and less than half of its November peak near $67,000.
SPACs, the so-called ‘blank-check’ companies that became immensely popular in recent years — one was used to launch former president Donald Trump’s social media platform — are “performing poorly,” Mould noted, and new transactions “are getting a cool reception.”
Last week, signs of genuine panic surfaced in response to disappointing earnings reports from Walmart, the nation’s largest grocer and world’s biggest retailer, and Target, another retail titan, with both companies suffering their worst days of trading in decades after raising concerns about the ways rising costs were eating into their businesses.
Another influx of corporate earnings will roll in this week, including reports from Costco, Best Buy, Nordstrom, Macy’s, Dollar General and Zoom. Meanwhile, the World Economic Forum holds its annual gathering in Davos in the midst of a looming global slowdown.
Bear markets happen on a relatively regular cycle, and there have been 14 since 1945, lasting an average of 9.5 months. That is significantly shorter than bull markets, which last 2.7 years on average.
If bear markets coincide with a recession, history has shown, they deepen and lengthen. If they don’t, the outcome brightens, with losses easing and gains returning sooner.
In some sense, the market is overdue for a pullback. The last bear market ended in March 2020, early in the pandemic, and lasted only 33 days. And there has not been a sustained bear market since 2009, at the end of the global financial crisis.
Of the many threats to the emphatic growth stocks have enjoyed since the March 2020 downturn, inflation is casting the coldest shadow. The Fed hasn’t ruled out moving more aggressively if inflation doesn’t cool considerably, and investors are worried about how that could weigh on growth.
Gas prices remained at an all-time high Monday according to data tracked by AAA, with the national average hitting $4.59 a gallon. Just last week, for the first time, the average price topped $4 in every U.S. state.
For those worried about how much volatility may still be in store, history has some comfort according to Chris Larkin, managing director of investment strategy at Morgan Stanley’s E-Trade. In most bear markets since 1957, the market was already closer, time-wise, to its eventual low than its pre-bear high, Larkin noted in commentary Monday.
“In other words, when a bear market “started,” there may have been more downside to come, but more often than not, the worst was already in the rear-view mirror,” Larkin said.