On Monday, the dollar hit two-decade highs, global stocks fell, and government bonds tumbled. Investors became worried about the Fed’s aggressive coverage tightening, which they say could trigger a recession. Inflation fears also drove the gap between US two-year and 10-year Treasury yields to invert for the first time since April, a sign of a possible financial contraction.
While the S&P 500 plunged 22% in 2022, the Dow fell 17 percent, and the Nasdaq has lost nearly a third of its value. Fears of stagflation have reached a record high, and global economic growth optimism has slumped to an all-time low. Meanwhile, cryptocurrency prices have plummeted, with bitcoin falling to $22,000 on Tuesday from over $65,000 in November.
The Fed’s actions have heightened fears of inflation. Inflationary fears have been the catalyst for market declines and are weighing heavily on the S&P 500. Meanwhile, a high-quality inflation reading released this week by the Federal Reserve has further heightened fears. However, the data has given investors plenty of time to make a rational decision about their investment strategy. If they want to avoid a bear market, they should align their investments with inflation and monetary policies.
Inflation worries have fueled the recent selloff, with the S&P 500 index down nearly 20 percent from its recent record high. The market has since recovered, closing Monday only 22 percent below its Jan. 3 record closing high. That puts the index in a bear market, which is a rare indicator of investor concerns. Further, rising interest rates and inflation are contributing to the stock market’s steep decline.
The S&P 500 has experienced thirteen bear markets since 1946. On average, the S&P 500 lost more than 32.7 percent during those times. During the recent 2007-2009 financial crisis, the dot-com bubble popped and many tech companies went under. That bear market lasted two years. This most recent downturn took two years to recover from and returned to its prior high. It has also taken between three and 69 months to reach breakeven levels.
Recent reports have revealed that the Fed will raise interest rates seven more times this year. This is the biggest hike since 1994. Some economists fear that the Fed will be forced into more aggressive action because of the high rate of inflation. But, while this is a bear market, the Fed may be able to reverse it before the market crashes further. In the meantime, the S&P 500 is back in bear market territory.