US stocks fell further this week after a flood of bad news from investors.
Central banks around the world are trying to combat high inflation by raising borrowing costs without harming long-term growth prospects. Adding to the uncertainty and fear, tensions between the West and Russia are rising after Moscow’s intervention in Ukraine.
In the U.S., the S&P 500 — a proxy for the health of retirement and college savings accounts — fell to an almost two-year low this week and is set for a monthly decline of about 8 percent.
The tech-heavy Nasdaq 100 has lost nearly 33 percent so far in 2022, the Dow Jones Industrial Average has lost more than 20 percent, and the world’s most popular cryptocurrency, Bitcoin, has lost nearly 60 percent of its value. As interest rates rise, so do home prices, making loans more expensive for potential buyers.
The Federal Reserve, the nation’s central bank, is tasked with combating the highest inflation in decades, and is doing so by raising interest rates. But can it raise the cost of capital to dampen demand and moderate prices without plunging the economy into deep recession?
“It’s really a no-win situation right now. Mainly because of the number of shocks policymakers have to deal with,” Cristian deRitis, lead economist at New York-based research firm Moody’s, told Al Jazeera.
How low can stocks go? What exactly is a bear market? And is there light at the end of the tunnel?
Here is the short answer.
I hear the US is in a bear market. What exactly is this?
A bear market occurs when a broad market index falls more than 20 percent from recent highs.
Why is the US in a bear market right now?
Peter Essele, head of portfolio management at Massachusetts-based Commonwealth Financial Network, put it this way: “Persistent concerns about inflation and the Fed’s ability to tame prices without a sharp cut.”
What is the cause of high inflation and why are prices 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 “has pumped $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 shut down and economies ground to a halt to contain the spread of the coronavirus. Millions of Americans were stranded with nowhere to go and pass the stimulus checks that just came out of the press. This has caused stock prices to skyrocket in the US, be it stocks, Bitcoin or home prices. It also led to increased demand for goods, which, as we are now seeing, led to the highest increase in the cost of living seen in decades.
How does this cause the stock market to go down?
As the Fed raises interest rates, which significantly increases the cost of borrowing to lower the cost of goods and services, people begin to fear a slowdown in the economy. This lowers the price of stocks and other investments.
Are the current economic conditions really the result of what happened in the last 2 years?
The last two years have been unprecedented in many respects. But what we’re seeing today can also be attributed to the extremely low interest rates of the last decade, when the government made it cheaper for Americans to borrow money after the 2007-2008 financial crisis, Essele told Al Jazeera.
Did the markets just not rally?
Stocks rallied in August. Things were looking up when gasoline prices, which had risen in previous months, fell sharply. Investors were hoping the Fed would ease rate hikes if inflation numbers for August showed a cooling of consumer prices. But prices remained high, rising 8.3 percent in August from a year earlier, despite lower prices for gasoline, food and other essential goods.
Where are we now?
“Inflation is becoming more structural and investors are now worried about stagflation,” Essele told Al Jazeera, adding that price increases could continue for a long time. 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 roil markets.
“But we’re three-quarters of the way through a bear market,” Essele said.
I don’t own stocks, why should I care about the bear market?
Although stock market investors are the most affected by the US bear market, there are spillover effects to the rest of the economy, primarily due to the “wealth effect”. That is, as households see the value of their pension and stock portfolios decline, they will pull back on spending.
“Given how dependent the US economy is on consumer spending, the impact could be significant and widespread,” Moody’s deRitis told Al Jazeera. “Discretionary sectors such as travel, leisure and hospitality are likely to be most immediately affected, but other industries such as housing and retail will face a fall in demand as households exercise caution.”