Investors initially acted with relief when the US Fed raised its main interest rate by 0.5 percentage points last week, even though it was “the first rise of that magnitude in more than two decades”, said the FT. The thinking was: it could have been worse. Fed chairman Jay Powell appeared to rule out an even larger rise of 0.75% for now. But it wasn’t long before “market bullishness” again gave way to nerves about how far borrowing costs would have to rise to tackle runaway inflation. The familiar “whipsaw” pattern reasserted itself: “strong rallies on some days, but even sharper sell-offs on others, as puzzled investors tried to position themselves for the end of easy-money policies”.
Wall Street has now “endured its worst run of weekly losses in more than a decade – six in a row”, said The Trader in Investors Chronicle. And, as yet, this bear market looks very far from turning. The rout is increasingly global, said Russell Hotten in The Times. Indices across the world “sank deep into the red” earlier this week as worries about China’s falling growth, and the economic fallout of the Ukraine war, combined with concerns over whether central banks can tame inflation “without tipping the world’s largest economies into recession”. Even “diversified” portfolios are unsafe in the current environment, said The Economist. “In America, investing 60% in stocks and 40% in bonds produced an annual average return of 11% from 2008 to 2021.” That strategy has lost 10% this year. “Whereas 2021 marked the apex of the ‘everything rally’, in which most asset prices rose, 2022 could mark the start of an ‘everything slump’.”
The big question is how much lower the US S&P 500 might fall, said Will Daniel in Fortune. The good news, according to Bank of America strategist Michael Hartnett, is that “bear markets are quicker than bull markets”. Based on data gleaned from the last 19 of them, he reckons the S&P 500 “still has another roughly 25% downturn ahead of it from current levels”. The bottom, he suggests, might be hit in October – though “a floor does not equal a new bull market for tech stocks”, which are likely to “remain in a bear market for the next two years”. A lot of speculation has already been flushed out of the market, which is “healthy”, said John Authers on Bloomberg. But ultimately this is about economics. “If inflation comes under control relatively quickly and the world escapes without a dose of stagflation, then it will be that much easier to justify paying up for stocks”. But if the economy “moves to the worse end of expectations, with negative growth and higher inflation”, expect the falls to continue. It’s not the cheeriest of messages.
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