Stocks sat in a holding pattern after as the Dow Jones Industrial Average rose 2% on Monday but lost nearly 1% on the broader S&P 500 index and more than 2% on the Nasdaq composite. A drop in the Dow will mark its ninth instance on record before World War II.
The Bear Market
Bear markets typically occur as drops of 20% or more, but this one is different. Stock market declines in 2021 have only partially reversed the boom it experienced during the first two years of the panic when rates were at rock bottom as the Fed was pumping money into the system. Stock prices may have burst, but they remain high.
The S&P 500 closed at an all-time high of 3,386.15 on February 19, 2020, just a month before the onset of the pandemic. About 587 points, or about 17 percent, above its pre-pandemic high, the index closed at 3,973.75 on Monday. Nasdaq composite closed at 11,535.27 on May 23, 2022, about 17 percent higher than its pre-pandemic peak of 9,817.18 on February 19, 2020.
Recent stock market declines have shaken investors, particularly those with long-held favorites like Netflix, Zoom, and Peloton. These stocks are now trading below their pandemic peaks. Most people, especially those who do not own stocks, want to know whether the market slump is a correction or a recession.
Despite a dramatic surge in inflation that has led to a fall in real wages, spending and hiring have held up pretty well despite a fall in the Nasdaq. Retail sales rose by 0.9 percent last month, translating into an 8.2 percent increase year-over-year. In addition, employers have added more than half a million jobs per month, on average, so far in 2022.
A weakening economy often leads to loan delinquencies rising at JPMorgan Chase, the country’s biggest bank. Credit-card debt has returned to pre-pandemic levels, including auto loans and student loans. Moreover, consumer prices and interest rates are rising at the same time. Delinquencies on auto loans are increasing, particularly among borrowers with low credit scores, even as nearly all borrowers keep up with their payments.
Effect of The Russian Invasion
The oil price spike is due to Russia’s invasion of Ukraine, and new China coronavirus lockdowns have contributed to supply chain delays. Before this, economists were hopeful that inflation would decline sharply in the latter half of this year.
According to AAA, gas prices are now over $4.50 per gallon in the United States. By August, Chase predicts $6.20 a gallon. Target and Walmart report inflation-wary consumers buying essentials and cheaper brands despite the high level of retail sales. Other sectors of the economy are also showing signs of weakness or slowing growth, including the housing market, where mortgage rates have risen sharply.
In the NABEC study, only one-quarter of respondents expect a recession in 2023 or this year. Survey respondents predict actual gross domestic product will rise just 1.8% in the fourth quarter of this year compared to the same quarter of 2021, which represents a significant slowdown from previous estimates. Respondents project 5.6% inflation against the Federal Reserve’s 2 percent target.
Is anything to be done?
In one analyst’s opinion, today’s pricing is still overly optimistic, and it’s just a small change compared to the secular change occurring. As yet, it’s nearly impossible to predict when the Fed will end its rate increases so that the markets will stabilize. Visit the Stork Dork website for the latest stock market investing tips.