Report: Markets Crashing Faster Than Anyone Expected Under Biden

By Mark Gruber | Sunday, 19 June 2022 04:45 PM
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Report: Markets Crashing Faster Than Anyone Expected Under Biden

The stock market closed with mixed gains Friday to conclude a severe week for the market and the worst weekly loss for the S&P 500 index since March 2020.

The S&P ended Friday with a growth of 0.2 percent on the day but down almost 4.3 percent on the week. The Nasdaq composite rose 1.4 percent to end with a weekly loss of 1.7 percent, and Dow Jones Industrial Average fell 38 points to close the week with a loss of 4 percent. The Dow also closed below 30,000 points Thursday for the first time since late 2020.

Stocks whipsawed throughout the week, expecting and reacting to the Federal Reserve’s first 0.75 percentage point interest rate hike since 1994.

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The market took abrupt losses Monday and Tuesday amid concern over whether the Fed would break from its signaled plan to hike rates by 0.5 percentage points before recovering Wednesday in the wake of the Fed’s larger rate cut. However, stocks dropped Thursday again before striking a plateau into a three-day weekend, with the market closed Monday in observance of Juneteenth.

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Stock values tend to fall as the Fed hikes interest rates. As borrowing costs throughout the economy increase, consumers and businesses tend to pay less money and invest less in harder assets like stocks and other securities. Business profit margins also tend to narrow as they face slower sales and higher interest rates on their own loans.

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All three major stock indexes have already fallen more than 20 percent from their most recent record highs hit late last year, the formal designation for a “bear market.”

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However, the Wall Street Journal reported on Monday that ongoing inflation in the U.S. – which tapped 8.6% in May according to figures published on Friday – could lead the Fed to increase its short-term interest rate by three-quarters of a percentage point. That’s triple the usual amount and something the Fed hasn’t done since 1994. Traders now see a 34% probability of such a hike, up from just 3% a week ago, according to CME Group.

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Economists at JP Morgan and Goldman Sachs immediately increased their estimates for the Fed’s decision – due to be announced on Wednesday – to an increase of 0.75%.

Such a move would put strain on other central banks to raise rates and many analysts fear that could choke off the post-pandemic recovery in the global economy and lead to recession.

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Chris Beauchamp, the chief market analyst at IG in London, said the Fed looked like it was still playing “catchup” with inflation and a recession was on the cards.

“It’s still too early to say a recession is definitely coming in the US,” he said, “but a ‘hard landing’ seems very hard to avoid at this point given the way inflation is still rising.”

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