US stocks fell further this week as investors grappled with a barrage of bad news.
Central banks around the world are struggling to combat sky-high inflation by increasing the cost of borrowing without harming long-term growth prospects. Adding to the uncertainty and fear are rising tensions between the West and Russia following Moscow’s invasion of Ukraine.
In the United States, the S&P 500 – a proxy for the health of retirement and college savings accounts – fell this week to its lowest level in nearly two years and set for a monthly decline of nearly 8 percent.
The high-tech Nasdaq 100 has fallen nearly 33 percent so far in 2022, the Dow Jones Industrial Average has lost more than 20 percent and the world’s most famous cryptocurrency, Bitcoin, has lost nearly 60 percent of its value. House prices are also falling as interest rates rise, making loans more expensive for potential buyers.
The Federal Reserve, the country’s central bank, is tasked with fighting the highest inflation in years and is doing so by raising interest rates. But can it increase the cost of capital to reduce demand and moderate prices without pushing the economy into recession?
“It’s a no-win situation at this point. Mainly because of the number of shocks that policymakers had to deal with,” Cristian deRitis, chief economist at Moody’s, a research firm based in New York, explained to Al Jazeera.
How much further down 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 keep hearing that the US is in a bear market. What exactly is that?
A bear market occurs when a broad market index falls more than 20 percent from its most recent highs.
Why is the US in a bear market right now?
“Persistent concerns about inflation and the Fed’s ability to tame prices without a hard landing,” explained Peter Essele, head of portfolio management at Commonwealth Financial Network, a Massachusetts-based firm.
What is the reason behind the high inflation and why are prices out of control?
Kenneth McLaughlin, a professor of economics at Hunter College in New York, told Al Jazeera that one of the reasons the federal government is “pouring $5 trillion into the economy including through stimulus checks during the pandemic for good -intent but no plans to pay for it.”
In other words?
Think back to early 2020 when businesses shut down and economies came to a halt to stop the spread of the coronavirus. Millions of Americans found themselves locked out with nowhere to go and spend the fresh stimulus checks. That caused the equity prices, whatever stocks, Bitcoin and house prices across the US, to come to light. It also led to an increase in the demand for goods and, as we now see, led to the highest rise in the cost of living in recent years.
How does the stock market go down because of this?
As the Fed raises rates, which is essentially increasing the cost of borrowing to reduce the price of goods and services, people fear a slowdown in the economy. This puts pressure on stock prices and other investments.
Are the current economic conditions really the result of what has happened in the last 2 years?
The past two years have been unprecedented in many respects. But what we’re seeing today can be attributed to very low interest rates over the last decade when the government, after the 2007-2008 financial crisis, made it cheaper for Americans to borrow, said Essele by Al Jazeera.
Were the markets just a rally?
Stocks rallied in August. Things were getting worse when petrol prices, which had been very high in the previous months, fell sharply. Investors had hoped that the Fed might ease interest rate hikes if inflation numbers for August showed that consumer prices had cooled. But despite cheaper petrol, food and other essentials, prices remained high – up 8.3 per cent in August compared to a year earlier.
Where are we now?
“Inflation is becoming more structural and investors are now concerned about stagnation,” Essele explained to Al Jazeera, suggesting that price increases may be here to stay in the long term. Stagflation is a mashup 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 the growing tension between the West and Russia add to the uncertainty and will continue to upset investors and the country’s markets.
“But we’re probably three-quarters of the way through the bear market,” Essele predicted.
I have no stocks, why should I care about a bear market?
While stock investors are the most directly affected by a bear market in the United States, the “wealth effect” has knock-on effects for the rest of the economy. That is, as households see the value of their retirement and stock portfolios decline, they will pull back on their spending.
“Given how dependent the US economy is on consumer spending, this impact can be significant and far-reaching,” deRitis Moody told Al Jazeera. “Discretionary sectors such as travel, leisure and hospitality may feel the most immediate effect but other industries such as housing and retail will see reduced demand as cautious households grow.”