The 2022 stock sell-off intensified on Monday with the S&P 500 tumbling to a fresh low for the year and closing in bear market territory as recession fears grew ahead of this week's key Federal Reserve meeting.
The S&P 500 fell 3.88% to 3,749.63, marking its lowest level since March 2021 and bringing its losses from its January record to more than 21%. The benchmark closed in bear market territory (down more than 20% from its high) after trading there briefly on an intraday basis about three weeks ago. Some on Wall Street say it's not an official bear market until the index closes there and that's what happened on Monday. The last time stocks were in a bear market was in March 2020 at the onset of the pandemic.
The Dow Jones Industrial Average dropped 876.05 points, or 2.79%, to settle at 30,516.74, about 17% off its record high. The Nasdaq Composite tumbled 4.68% to close at 10,809.23, bringing its losses for this sell-off to more than 33%.
Major averages hit their lows of the session in the final 30 minutes after a Wall Street Journal report suggested the Fed would consider raising rates by 0.75% on Wednesday, more than the half-point increase currently expected.
There were few places to hide on Monday as Treasury bond prices dropped, pushing the 10-year yield to its largest one-day move since March 2020. Bitcoin was slammed by 15%. At one point during the trading day, every single stock in the S&P 500 was lower. Only five stocks in the benchmark closed the day in the green.
The moves came as investors continued to digest a hotter-than-expected inflation report on Friday and braced for the Fed to raise rates later in the week.
"Anyone who wants to be bullish can't find anything to hang their hat on," said Jack Ablin, founding partner of Cresset Capital. "There's nothing out there right now with valuations under question, with interest rates rising, the direction of the economy uncertain."
Recession fears growing
Shares of Boeing, Salesforce and American Express fell 8.7%, 6.9% and 5.2%, respectively, dragging down the Dow as recession fears picked up. Beaten-up tech shares also took a hit with Netflix, Tesla and Nvidia down more than 7% as the Nasdaq touched a fresh 52-week low and its lowest level since November 2020.
Travel stocks also slipped on Monday as Carnival Corporation and Norwegian Cruise Line plummeted about 10% and 12%, respectively. Delta Air Lines dropped more than 8% while United tumbled about 10%.
All major S&P 500 sectors dipped into the red led by energy, which fell more than 5%. Consumer discretionary, communication services, information technology and utilities all dropped more than 4%.
The dramatic moves lower could indicate that many investors are profit-taking or repositioning their portfolios, and may signal that markets are in "a capitulation stage," said Jeff Kilburg, chief investment officer of Sanctuary Wealth.
As equities sold off short-term rates jumped on Monday. The 10-year Treasury rose more than 20 basis points higher to top 3.3%, as investors continued to bet the Fed may have to get more aggressive to squash inflation. Prices move inversely to yields and 1 basis point equals 0.01%. The 2-year Treasury yield was last up roughly 30 basis points to about 3.3%.
Monday's moves came after the major averages last week posted their biggest weekly declines since late January as investors grew increasingly concerned rising inflation will tip the economy into a recession. The Bureau of Labor Statistics reported Friday that the U.S. consumer price index rose last month by 8.6% from a year ago, its fastest increase since December 1981. That gain topped economists' expectations.
Gasoline prices also hit above $5 a gallon over the weekend, further fanning fears over rising inflation and falling consumer confidence.
Meanwhile, bitcoin tumbled below $24,000 on Monday and hit its lowest level since 2020 as risk-averse investors continued to dump crypto as rates rise. The news sent shared of crypto-related companies including Coinbase and Microstrategy down 11% and 25%, respectively.
"The cryptocurrency bitcoin has been a great gauge of investors' risk threshold for equities," wrote JC O'Hara, chief market technician at MKM Partners. "Plenty of longs who bought in last year are still trapped, and thus we could easily see a pullback to 19,500. That would be a bearish read through for stocks."
Investors are looking ahead to Wednesday when the Fed is expected to announce at least a half-point rate hike. The central bank has already raised rates twice this year, including a 50-basis-point increase in May in an effort to stave off the recent inflation surge.
Some economists believe the Fed could even raise rates by 0.75% this week following Friday's CPI report.
Time to play defense
If history is any guide, this sell-off may have further to go. Data from Bespoke Investment Group shows that since World War II there have been 14 bear markets on a closing basis and on average, the S&P 500 has pulled back a median of 30%, with the downturn lasting a median of 359 days.
Amid Monday's sell-off, investors should maintain a "defensive posture" in areas like consumer staples and health care, said Truist's Keith Lerner. These stocks may not post big gains but can outperform relative to other sectors, he said.
Ablin is looking at gold as a continued safe haven even as prices fall on the day, along with companies that pay consistent dividends.
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