Why the stock market crashed and what’s coming next, experts say

As alarms about inflation and a possible recession have sounded in recent months, a stock market rally has offered a source of optimism – until this week.

Them&P 500 fell 2.1% on Monday, its worst day in more than two months. At Wednesday afternoon’s session, the index had recovered some of its losses but remained down for the week.

The recent drop marks the market’s final swing this year. Rebounding from a historic plunge in the first half of 2022, the S&P 500 rose more than 15% in a two-month period beginning in mid-June. During the same period, the tech-heavy Nasdaq climbed more than 17% and the Dow Jones Industrial Average rose nearly 14%.

In fact, the rally is one of the main reasons for the slowdown in recent days as investors determined that stocks had become too expensive, market analysts said. The fall also stems from fears that the Federal Reserve will continue a series of aggressive rate hikes, which aim to reduce inflation by slowing the economy but risk tipping the United States into a recession, they added. .

But analysts disagreed on whether this week’s slowdown marks a brief hiccup or a sign of further losses to come, suggesting murky economic data supports varied interpretations of the outlook for the economy. economy and, in turn, corporate earnings, the key focus of stock market forecasters.

“Markets don’t go up or down forever,” Ed Yardeni, president of market advisory firm Yardeni Research and former chief investment strategist at Deutsche Bank’s U.S. equity division, told ABC News. “At some point, buyers run out and new buyers think things have gotten expensive and wait for a pullback.”

“It’s a showdown between bulls and bears,” he added. “For a while the bears were gaining ground. Over the past couple of months the bulls have been gaining ground and now we may be at an impasse for a while.”

Market volatility is driven in large part by looming fears that skyrocketing inflation will force the Fed to pursue large and sustained interest rate hikes, which would slow the economy and risk a recession, analysts said.

Generally, the market rose in response to news about slowing inflation and a possible slowdown in rate hikes; Inflation spikes and rate movements are a common cause of liquidations.

For example, weaker than expected inflation data released earlier this month sent the S&P 500 hitting three-month high, reflecting optimism that price gains have peaked.

Federal Reserve Board Chairman Jerome Powell speaks during a press conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, DC, July 27, 2022.

Elizabeth Frantz/Reuters, FILE

In meetings in each of the past two months, the central bank has raised its benchmark interest rate by 0.75% – dramatic increases last seen in 1994.

Rate hikes may have contributed to a slowdown in price increases. Although still elevated, price increases last month have declined from the near-historic pace reached in June, according to data from the Bureau of Labor Statistics. The consumer price index, or CPI, rose 8.5% over the past year in July, a marked slowdown from a measured 9.1% year-on-year rate in June, the office said.

Still, Fed officials have signaled in recent days that the central bank intends to continue a series of rate hikes, aimed at bringing inflation back to its 2% target. Last Thursday, San Francisco Federal Reserve Chair Mary Daly told CNN that a 50 or 75 basis point hike at next month’s central bank meeting would be “reasonable” and that hikes rates would continue at least until 2023.

Such signals from the Fed have contributed to the market’s decline this week, Ivan Feinseth, market analyst at Tigress Financial, told ABC News.

“There is the fear that the Fed will have to raise rates aggressively to fight inflation, but also the fear of going too far and that the Fed itself will decimate the economy,” he said. he declares.

Market forecasters also face the challenge of murky economic data, Guggenheim analyst John DiFucci told ABC News.

Inflation remains near a 40-year high and GDP has slowed, raising the specter of stagflation, a damaging combination of high prices and sluggish growth. But observers can take comfort in the jobs data, which remains at robust levels, as the economy created a blockbuster 528,000 jobs last month and the unemployment rate rose to 3, 5%.

“Things are looking quite strong in some indicators of the macro economy, while things are looking quite weak in other indicators,” he said. “It’s the schizophrenic behavior of the market.”

Analysts have offered conflicting assessments of the market outlook, in part because murky market data sets an uncertain future for the economy.

The Fed could ease its aggressive rate hikes if inflation continues to fall, which could send stocks higher towards the end of the year, said Feinseth of Tigress Financial.

“We could see a new all-time high in the stock market by the end of the year,” he said.

A potential recession, however, would hammer corporate earnings, causing a prolonged market downturn, Guggenheim’s DiFucci said.

“If we’re going to go through a longer period of weakness, stocks that typically trade at higher multiples should moderate or decline,” he said. “It’s that simple.”

Yardeni, who identifies as “right in the middle” on the spectrum between bear and bull markets, predicted stocks would move “sideways.”

“Everyone is wondering these days whether the market is going to go up or down,” he said. “The third option is nowhere fast.”

ABC News

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