Stocks Down Again, S&P Officially Enters Bear Market Image: Bigstock Stocks plunged again yesterday on inflation fears, and uncertainty over what the Fed will do on interest rates. The Nasdaq was the biggest decliner yesterday giving up -4.68%. They have been in a bear market since March, and made a new low again yesterday, closing down -32.7% from their all-time high close. But the big news was in the S&P, which gave up -3.88% yesterday, and officially entered bear market territory as it closed down -21.8% from its all-time high close. The Dow was down -2.79% yesterday. They have so far avoided a bear market as they are 'only' down -17.1% from their all-time high close. But it's not much of a consolation, as stocks across the board sink. And the few percentage points between a bear market or not, don't seem to matter much. What does still matter, however, is what the Fed does on Wednesday, June 15th, at the conclusion of their 2-day FOMC meeting. After Friday's elevated May CPI report which showed inflation up 8.6% y/y, a new 41-year high, there's speculation that the Fed could depart from their telegraphed 50 basis point hike, and raise rates by 75 basis points or even 100 basis points. Prior to Friday's report, there was hope that inflation might have already peaked, given that April's reading was lower than March's 40-year high reading. And technically, inflation did moderate in May when you exclude Food and Energy. But even though economists like to exclude those two categories, it provides no relief to consumers since we all have to eat, and since oil is used in so many things beyond just fueling our tanks and powering our homes. And since it's clear the Fed is way behind the inflation curve, it's believed the Fed may have to dramatically accelerate their tightening if they hope to arrest inflation. And there's the uncertainty. Do they stick to their plan of 50 basis points in June and July? Or do they go big in one or two fell swoops to try and catch up and have an impact? Because the pace they've been on has not had much of an effect. And many are now believing that their expected 50 basis point moves won't have much of an impact either. The other unknown is whether the market would cheer a more aggressive Fed or not. On the one hand, if the Fed goes bigger, and faster, investors could applaud the move because maybe there's a chance the Fed could slow inflation down sooner rather than later. On the other hand, dramatic rate increases (or even faster quantitative tightening), could create enough demand destruction to send the economy into a recession. Some of these questions will be answered on Wednesday at 2:00 PM ET, when the Fed makes their announcement, and Jerome Powell gives his press conference shortly thereafter. In the meantime, traders will be watching the market closely for signs of capitulation. Yesterday's move did have a hint of panic to it as everything just seemed to go down. Earlier this year, when the market first started to go down, the market discarded its laggards first, along with those with troubled outlooks. But as the sell-off continued, especially lately, good stocks were getting thrown out as well, as people just wanted the pain to stop. That's one of the signs of capitulation. And when fear gets high enough, and 'all' of the selling is done, that can be the turning point. See you tomorrow, Kevin Matras Executive Vice President, Zacks Investment Research |
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