Premarket Actions: The Stock Market Sell-Off Could Be Starting

One step back: Last week, the Federal Reserve interest rates rose by three-quarters of a percentage point, its biggest rate hike since 1994. The Bank of England also raised its target rate for the fifth time since December. And the Swiss central bank high rates for the first time in 15 years.

They’ve barely finished. The BOE recognized that inflation peak about 11% in the fall, and the Fed just raised its 2022 inflation expectations by a full percentage point. Although Fed Chairman Jerome Powell said last week that there is still a chance the US economy could avoid recession, he admitted that Russia’s invasion of Ukraine, the ongoing pandemic and supply chain and energy “have raised the bar and created huge challenges … so we just don’t know.”

By withdrawing stimulus and putting the monetary policy engine in reverse, the Fed and other central banks have unsettled investors. The US stock market has entered a bear marketand last week was Wall Street’s worst since March 2020, with the S&P 500 down almost 6% and the Dow Jones tumbling 1,504 points, or about 5%.

US stocks have fallen 23% since hitting an all-time high on January 3. However, they could have much more room to fall, especially if efforts to rein in runaway prices cause the economy to slump.

“The Fed may be willing to take the economy into a recession to control inflation,” Anthony Saglimbene, global market strategist at Ameriprise, told me.

“I think that was probably in the back of investors’ minds, but now it’s front and center. Stocks are going to struggle until they figure out where that end point is for the Fed,” he added.

Recessions have not been kind to investors. Historically, bear markets during recessions have been longer and deeper than bear markets that weren’t associated with economic downturns, notes Sam Stovall, chief investment strategist at CFRA Research. Since World War II, stocks have fallen 28% in bear markets without recessions, and 36% during recessions.

recessions prevent people from spending, damaging the results of the companies. Although some Wall Street analysts have discounted a recession in their earnings forecasts, stocks may still be a bit pricey if history is any guide. Based on historical price-to-earnings ratios during a recession, Stovall predicts the S&P 500 could bottom around 3,215, a decline of about 33% from peak to trough.

Even analysts who aren’t predicting such a dramatic drop believe stocks have room to fall. Keith Lerner, chief market strategist at Truist Advisory Services, thinks the S&P 500 will bottom around 3,400, another 7.5% drop from Friday’s close.

“This would make an incredibly brutal market feel that much worse,” Lerner said. “And of course the markets could go beyond the average.”

A complicating factor: CmeCentral banks cannot trust the tools they used in past recessions. Traditionally, the Federal Reserve and other central banks cut rates and created money to buy government debt to stimulate the economy. But even if inflation moderates in a recession, many factors — commodity prices, fuel costs, and supply chain issues — are out of your control.

Cutting rates could worsen inflation, negating any price moderation we might get from an economic downturn.

The good news, if you can call it that, is that most economists who predict a recession expect a recession much shallower than the crash of the early 1980s. And stocks may have been so hammered by the end of the year that any signs of moderation in inflation or hints that the Federal Reserve may be winding down rate hikes could boost the market again.

“One of the best things for stocks right now is that given the downbeat sentiment, a little bit of good news could go a long way,” said Truist’s Lerner, who notes that bear markets tend to be much shorter than bear markets. bull markets, and stocks generally bottom out. several months before a recession ends. Another reason for optimism: In the year following a recession, the stock market returns an average of 40% to investors.

China is buying tons of Russian oil

Despite Western efforts to punish the Kremlin for Russia’s invasion of Ukraine, it has been unable to prevent President Vladimir Putin from selling off the country’s oil and gas. The taps have remained open and money continues to flow into Moscow for a variety of reasons: lack of alternative supplies, rising prices and willing buyers in other parts of the world.

The result: Russia’s economy, though in a deep recession, has largely avoided the crisis that many in the West expected.

This week, data from China’s General Administration of Customs illustrated just how difficult it has become to cut Russia’s main lifeline. The administration informed China imported 55% more Russian oil last month than in May 2021, and Russia has unseated Saudi Arabia as China’s top oil supplier.

The Saudis had been China’s top oil exporter for 19 consecutive months. But Russian crude has been heavily discounted as the country tries to find willing buyers, and China apparently couldn’t say no to bargain prices at a time of historically high energy costs. India has also been increasing its imports of Russian oil.

Chipmakers Brace for More Trouble as Russia Limits Rare Gas Exports

The European Union is gradually implementing an embargo on 90% of Russia’s oil, but it also has another card up its sleeve to limit the Kremlin’s options: A ban on insuring ships carrying Russian oil that would make it harder for Moscow to divert hundreds of thousands of barrels a day to India and China.

The European Union has announced that EU companies will not be able to “insure and finance the transportation” of Russian oil to third countries after a six-month transition period, reports my colleague Julia Horowitz. That could make it harder for Russia to find ships willing to load its crude.

It may not be that simple: the EU rule would likely push crude prices even higher, something politically vulnerable Western politicians, including US President Joe Biden, are less than enthusiastic about.

Russia has also benefited from higher crude prices. If the insurance ban drives prices up even higher, that could partially offset any damage the new rule may cause.

Oil fights in Libya

As if the world needed any more bad news about oil prices, Libya’s oil industry is in disarrayand it’s pumping less oil than it was a year ago, even as the world scrambles to find new sources of energy.

The conflict in the country has led to some puzzling and unreliable government reports about its oil production. Warring parties have used oil as leverage in their power struggle, reports my colleague Nadeen Ebrahim. Rival governments have taken control of oil facilities and shut them down several times.

That’s why Libya’s Oil Ministry said last week that output had dropped almost completely in June, to 100,000 barrels a day, down from 1.2 million bpd last year. This week, Oil Minister Mohamed Oun told CNN that some fields had come back online and production had risen to 800,000 barrels a day.

Still, that production remains lower than last year and underlines how Libya’s oil sector is still in crisis. No one is sure who is in charge of the country’s crude supply.

“There are certain parties that seek to gain an advantage by misrepresenting oil production figures,” said US Ambassador to Libya Richard Norland, calling last week’s Oil Ministry figures “inaccurate.”

“Actual production is significantly higher,” he said.

Until next time

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