As alarms about inflation and a possible recession sounded in recent months, a rally in the stock market offered a source of optimism, until this week. The S&P 500 fell 2.1% on Monday, its worst day in more than two months. As of Wednesday afternoon trading, the index had recovered some of its losses, but remained lower for the week. The latest drop marks the last swing of the market’s seesaw this year. Recovering from a historic decline in the first half of 2022, the S&P 500 rose more than 15% during a two-month period that began in mid-June.
During that same period, the tech-heavy Nasdaq rose more than 17% and the Dow Jones Industrial Average rose nearly 14%. In fact, this rally is a key reason for the decline in recent days, as investors determined that the stock was overvalued. , market analysts said. The fall also stems from fears that the Federal Reserve will continue a series of aggressive rate hikes, which are aimed at reducing inflation by slowing the economy but risk tipping the United States into a recession, they added. brief hiccup or a sign of more losses to come, suggesting that murky economic data is supporting mixed interpretations about the outlook for the economy and, in turn, corporate earnings, the key focus for stock forecasters.
“Markets don’t go up and down forever.” Ed Yardeni, president of market advisory firm Yardeni Research and former chief investment strategist for Deutsche Bank’s US equities division, told ABC News. “At some point, the buyers sell out and the new buyers think things have gotten too expensive and are waiting for a pullback.” “It’s a tug-of-war between the bulls and the bears,” he added. “For a while, the bears gained ground.
Over the last two months, the bulls gained ground and now we may be stalled for a while.” will require the Fed to pursue consistent and sizeable interest rate hikes, which would slow the economy and risk a recession, analysts said. Typically, the market has risen in response to news of slowing inflation and a possible easing of rate hikes; Inflation spikes and rate movements are a common cause of selling.
For example, lower-than-expected inflation data released earlier this month sent the S&P 500 up to its highest level in three months, reflecting optimism that price increases have peaked . Chairman Jerome Powell speaks during a news conference after a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, DC, July 27, 2022. Elizabeth Frantz/Reuters, FILEAn meetings of each of the last two months, the central Bank has increased its reference interest rate by 0.75%; the dramatic hikes were last matched in 1994.
The rate hikes may have contributed to a slowdown in price hikes. Although still high, price increases last month slowed from the near-record pace reached in June, according to data from the Bureau of Labor Statistics. The consumer price index, or CPI, rose 8.5 percent over the past year through July, a sharp slowdown from the 9.1 percent year-on-year rate measured in June, the bureau said . Still, Fed officials have signaled in recent days that the central bank intends to continue a series of rate hikes, with the goal of returning inflation to its 2% target.
Last Thursday, San Francisco Federal Reserve President Mary Daly told CNN that a 50- to 75-point hike at the central bank’s meeting next month would be “reasonable” and that rate hikes would continue at least until to 2023. Those signals from the Fed have contributed to the market’s decline this week, Ivan Feinseth, market analyst at Tigress Financial, told ABC News. “There are fears that the Fed will have to raise rates aggressively to stave off inflation, but there are also fears of overshooting and the Fed in and “Market forecasters also face the challenge of murky economic data” , Guggenheim analyst John DiFucci told ABC News. combination of high prices and anemic growth. But observers can take solace in the jobs data, which remains at solid levels as the economy added 528,000 jobs last month and the unemployment rate stands at 3.5%.” pretty weak in other indicators,” he said. “That’s the market’s schizophrenic behavior.” Analysts offered mixed assessments of the market’s outlook, in part because the murky market data set an uncertain future for the economy.
The Fed may ease its aggressive rate hikes if inflation continues to fall which could lift stocks towards the end of the year, Tigress Financial’s Feinseth said. “We could see a new all-time high in the stock market by the end of the year ” he said. A possible recession, however, would affect. Corporate profits, which led to a prolonged market decline, said Guggenheim’s DiFucci. “If we go through a longer period of weakness, it is likely that stocks that to higher multiples moderate or lower,” he said. “It’s as simple as that.” Yardeni, who identifies himself as “right in the middle” on the spectrum between bears and bulls in the market, predicted that stocks they would move “offshore t”. “Everyone is wondering these days whether the market is going to go up or down,” he said. “The third option is not fast anywhere.”