S&P 500 closed in bear market losing nearly 4% in one day as investors ready for Fed meeting this week

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Here’s what causes stagflation and why the US may be at risk for it

The U.S. may be at risk for stagflation – a combination of slow growth and inflation. Here’s what happened the last time the country experienced it.

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The bear is growling on Wall Street.

Monday’s stock market drop officially put the S&P 500 stock index in a bear market, meaning it has declined 20% or more from its January peak. 

The S&P 500 closed down 151 points, or 3.87%, while the Dow Jones Industrial Average closed down 876 points, or 2.79%. The Nasdaq Composite, which already hit the bear market threshold before Monday, closed down 531 points, or 4.68%.

Meanwhile, yields on 10-year Treasury notes rose to around 3.375%, the highest level in over a decade. Yields on 2-year Treasury notes hovered slightly below 10-year Treasuries at 3.363%.

Monday’s selloff is a continuation of Friday’s, which came after May’s Consumer Price Index report revealed that inflation had not peaked, sparking fears that the Federal Reserve could raise interest rates by more than 50 basis points at its meeting later this week. 

Even though Fed Chairman Jerome Powell said last month the Fed wasn’t entertaining a 75-basis-point rate increase, the Wall Street Journal reported Monday that one was now on the table. Some Wall Street economists, including from JP Morgan, Barclays, and Jefferies, have revised their predictions to align with that. 

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Powell’s words during Wednesday’s press conference could speak louder to markets than the actions the central bank takes, investment advisers told USA TODAY.

“People don’t like it when we hear the Fed say things like ‘Oh, I was caught off guard by this or I wasn’t anticipating that,” said William Huston, chief investment officer at Bay Street Capital Holdings. Whether or not the Fed hikes higher than the widely expected 50-basis-point hike, investors are looking for “a well-articulated plan.”  

But an even larger selloff could be ignited if Powell doesn’t do enough to quell investors’ concerns that “the Fed doesn’t have a clear sense of direction or grip on inflation.” 

Market moves to make  

If you invested $10,000 in the S&P 500 when it was at its record level in January, you would’ve lost about $2,200 on paper. 

Investors hungry for relief from Monday’s carnage swooped up some consumer staples stocks.

Despite Monday’s widespread selloff, McDonald’s and Domino’s Pizza were among the few stocks that closed higher. That could hint to investors to shift more of their portfolios into consumer staples, which tend to perform better during recessions compared to other asset classes, said Huston. 

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But he cautioned against building your investment strategy on one day’s performance. “It’s difficult to pinpoint exactly why Coke stock was up at one point today.” 

Brian Price, head of investment management for Commonwealth Financial Network, is also keeping an eye on buying into the bond selloff. Bond prices fall when yields rise. “If we are at or near inflation peak inflation then buying at these levels is going to be positive in the long-term.” 

And longer-term is really the only way to play the market, some say.

“It’s been a tough year for many investors, and we don’t think we’re in a position yet to call a tactical bottom for either stocks or bonds,” Barry Gilbert, asset allocation strategist at LPL Financial, wrote in a commentary. “But looking out strategically, based on better valuations and still mostly favorable fundamentals, we think the long-term outlook has brightened quite a bit.”

Bear market recovery time 

The average length of the 26 S&P 500 bear markets since 1926 is around 9.6 months. The average S&P 500 decline over the course of those bear markets was more than 35%, according to Ned Davis Research. 

But the most recent bear market that quickly unfolded when the pandemic began in the U.S. lasted 33 days, making it the shortest bear market since the Great Depression. 

Michael O’Keeffe, chief investment officer at Stifel, predicts the new bear market will be relatively short-lived. One bright spot, he said, is that S&P 500 earnings growth rate is still expected to be 10.4% for 2022, according to analysts surveyed by FactSet.

The S&P 500 earnings growth rate for the second quarter, however, hovers around 4% which would be the rate the index experienced since the fourth quarter of 2020, according to FactSet. 

A little bit of good news could go a long way in the current market climate, said O’Keeffe. Data that demonstrates inflation is slowing would give the market the biggest bang for its buck, he added. 

But when that will happen is anyone’s guess right now with prices still accelerating. Gas at the pump surged to a record high on Monday to $5.01 per gallon of regular unleaded, according to AAA. 

“The oil market is still very tight as the crude demand outlook remains strong, while supplies are razor thin,” Edward Moya, senior market analyst at foreign exchange firm OANDA. “Eventually crude demand destruction will occur, but that is not the story today nor will it be until later in the summer.”

Oil and gas prices are seen as a strong barometer for inflation because they touch almost every aspect of the economy – from producing the goods to transporting them.

Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here

Medora Lee contributed.