Highlights:
- S&P 500 is down more than 20% in 2022, entering Bear Market Territory.
- US May Consumer Prices Increase 8.6% From Year Earlier; Reaching a New 40-Year High.
- US Consumer Sentiment Plunged to 50.2, vs. 58.1 estimated.
- The Federal Reserve hints at a 50 BPS rate hike this week.
The S&P 500 plunged 3.80% today, following increased fears of a recession and higher interest rates. The stock market is now in bear market territory, following last week’s CPI report. The Federal Reserve is under fire, as it rushes to get inflation under control.
Energy and food prices continue to rise, making it clear to consumers that inflation is not ‘’transitory.’’ Over the last 12 months, inflation for all items rose 8.6% year-over-year reaching another 40-year high. The food index increased 1.2% in May, up from 0.9% in the prior month. The energy index rose 3.7% in May, following a 2.7% decline in April.
The Russia/Ukraine war prompted rapid increases in gasoline prices at the pump. Record gasoline prices have put immense strains on the U.S. consumer. Rising fuel prices continue to push up the cost of living, with the average consumer spending more on daily essentials (I.e. Rent, food, transportation). In May, the gasoline index rose 48.7% year-over-year, with the fuel index more than doubling, rising 106.7%. This represents the largest increase since 1935.
Is a Recession Coming?
This is now fuelling the narrative of a possible recession on the horizon. On Friday June 10th, The University of Michigan’s consumer sentiment survey in May came in much lower than expected. Consumer sentiment hit record lows of 50.2 vs. 58.1 expected. Rising inflation and higher interest rates have contributed to deteriorating consumer confidence. While the U.S. consumer has remained resilient, quantitative tightening and higher interest rates in 2022 may lead to the average consumer cutting back on its spending.
The Federal Reserve is hinting at a 50 BPS rate hike this week, with the possibility of a 75 BPS hike in July. The Fed is forced to use all its tools to curb rising inflationary pressures across the U.S. economy. This will likely lead to more volatility in the stock, bond, real estate and cryptocurrency markets.
Today the global cryptocurrency market plunged more than 12%. As recession fears intensify, investors are likely to leave risk assets like cryptocurrency and move into cash. In the last week Bitcoin has lost more than 25% of its value, while Ethereum plunged more than 30%.
Bear Market: Final Takeaway
Supply chain bottlenecks, rising inflation and higher interest rates continue to fuel fears of an economic recession. A recession is generally defined as two consecutive quarters of falling GDP. Whether a recession or a stock market crash is on the horizon, investors should brace for more volatility ahead.
