US stocks plunged further this week as investors faced a barrage of bad news.
Central banks around the world have been struggling to fight high inflation by raising the cost of borrowing without hurting long-term growth prospects. Adding to the uncertainty and fear are the growing tensions between the West and Russia following Moscow’s invasion of Ukraine.
In the US, the S&P 500, a gauge of the health of retirement and college savings accounts, fell this week to its lowest level in nearly two years and was set for a monthly decline of almost 8 percent.
The big-tech Nasdaq 100 is down nearly 33 percent so far in 2022, the Dow Jones Industrial Average is down more than 20 percent, while the world’s best-known cryptocurrency Bitcoin is down nearly 60 percent. its value. Home prices are also falling as interest rates soar, making loans for potential buyers more expensive.
The Federal Reserve, the country’s central bank, is tasked with fighting the highest inflation in decades and has been doing so by raising interest rates. But can you raise the cost of capital to reduce demand and moderate prices without plunging the economy into a deep recession?
“It’s really a no-win situation right now. Largely because of the number of shocks that politicians have had to deal with,” Cristian deRitis, lead economist at Moody’s, a New York-based research firm, told Al Jazeera.
How much lower can stocks go? What exactly is a bear market? And is there a light at the end of the tunnel?
Here is the short answer.
I keep hearing that America is in a bear market. What is that exactly?
A bear market occurs when a broad market index falls more than 20 percent from recent highs.
Why is the US currently in a bear market?
“Lingering concerns about inflation and the Fed’s ability to control prices without a hard landing,” is how Peter Essele, head of portfolio management at Commonwealth Financial Network, a Massachusetts-based firm, explained it.
What is the reason behind high inflation and why prices are out of control?
Kenneth McLaughlin, an economics professor at Hunter College in New York, told Al Jazeera that one reason is that the federal government “injected $5 trillion into the economy, including through stimulus checks during the pandemic with good intentions.” but no plans to pay. for it.”
In other words?
Think back to early 2020 when businesses closed and economies ground to a halt to slow the spread of the coronavirus. Millions of Americans found themselves cooped up with nowhere to go to spend stimulus checks fresh off the press. That caused stock prices, whether they were stocks, Bitcoin, and US home prices, to skyrocket. It also caused an increase in the demand for goods and that, as we see now, has led to the highest increase in the cost of living seen in decades.
How does this make the stock market go down?
As the Federal Reserve raises rates, essentially raising the cost of borrowing to drive down the price of goods and services, people begin to fear a slowdown in the economy. This pushes down the price of stocks and other investments.
Are the current economic conditions really just the consequence of what happened in the last 2 years?
The last two years have been unprecedented in many aspects. But what we are seeing today can also be attributed to the extremely low interest rates of the last decade when, following the 2007-2008 financial crisis, the government made borrowing cheaper for Americans, Essele told Al Jazeera.
Haven’t the markets just had a rally?
Stocks rebounded in August. Things were looking up when gasoline prices, which had skyrocketed in previous months, fell sharply. Investors clung to the hope that the Fed might ease rate hikes if August inflation figures showed consumer prices had cooled. But despite cheaper gasoline, food and other essentials, prices remained high, rising 8.3 percent in August from a year earlier.
Where are we now?
“Inflation is becoming more structural and investors are now worried about stagflation,” Essele explained to Al Jazeera, suggesting that the price rises may be here to stay in the long run. Stagflation is a combination of the words “inflation” and “stagnation” and refers to a situation where inflation is high even as the rate of economic growth slows.
So what does the future hold? And how long will this bear market last?
Expect above-average price pressures. The war in Ukraine and rising tensions between the West and Russia add to the uncertainty and will continue to spook investors and rattle markets.
“But we are likely three-quarters of the way through the bear market,” Essele predicted.
I don’t own stocks, why should I worry about a bear market?
While equity investors are the most directly affected by a US bear market, there are indirect effects on the rest of the economy mainly due to the “wealth effect”. That is, as households see the value of their retirement and stock portfolios decline, they will reduce their spending.
“Given how reliant the US economy is on consumer spending, this impact could be significant and widespread,” Moody’s of Ritis told Al Jazeera. “Discretionary sectors like travel, leisure and hospitality may feel the most immediate effect, but other industries like housing and retail will see reduced demand as households turn cautious.”