S&P 500 enters bear market territory as fears of economic recession grow

With rising inflation, US Fed could be under pressure to move more aggressively by raising interest rates more than what is expected.

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US stock market investors are pricing in the next few interest rate hikes which could ultimately impact the economy and corporate sector's profitability.

A day after the market meltdown that saw S&P 500 enter bear market, US stock futures are trading in green. Dow, S&P 500, Nasdaq futures were all trading higher by about 0.50% on Tuesday. US stocks showed extreme weakness on June 13, 2022 as prices of most shares ended lower. S&P 500 closed at 3,749.63, down by 151.23 points to end the day’s 3.88% lower. In market parlance, an index falling more than 20% from recent highs defines a bear market. On a YTD basis, S&P 500 on June 13 closed about 21.33% lower from its highs. So, S&P 500 after falling more than 20% from recent highs makes it enter a bear market.

“The S&P 500 had already admitted to being in a bear market since the start of the year. It tumbled 3.9% on the first day of trading of the week as a reaction to the fear of the Federal Reserve letting off a recession. The other two indices too sank very low with Nasdaq tanking 4.7% and Dow falling 2.8%,” says Kunal Sawhney, CEO of Kalkine Group.

US stock market investors are pricing in the next few interest rate hikes which could ultimately impact the economy and corporate sector’s profitability. The valuations that companies enjoyed during low interest rate regimes are seen to end in a rising interest rate environment.

The U.S. Federal Reserve monetary policy statement is scheduled on June 15. It is widely expected that the US Federal Reserve could raise interest rates by as much as 0.75% this week – its biggest single hike in borrowing costs for nearly 30 years. The US inflation rate had come in at 8.6% for May 2022.

“The pandemic, the war crisis, and other macroeconomic factors have choked the global economy. No amount of pacifying by the Fed seems to convince investors who are further agitated by the higher May CPI data triggered by rising food costs, rent, gasoline, and services,” adds Sawhney.

With rising inflation, US Fed could be under pressure to move more aggressively by raising interest rates more than what is expected. The direct outcome could be on consumer demand leading to pressure of corporate earnings. The fear of the economy getting pushed into recession is also looming high.

The volatility may, however, continue and bear market rallies could be the outcome.

S&P 500 bear market history shows such a big fall even in the past. The most recent bear market was seen in 2020 after the outbreak of Covid-19. Previously, bursting of the Tech Bubble in 2000-2002 and the Global Financial Crisis of 2007-2009 were the periods when investors battled the bear market environment.

How long will it take for the 2022 bear market to end is something that only time will tell. For long term investors, it’s the time spent in the market that will count more than trying to time the market. Maybe it’s time for cherry picking of stocks available at reasonable valuations with a long term view.

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