The S&P 500 opened this week in bear-market territory for the first time this year as inflation fears and rising Treasury yields spook investors. With the S&P experiencing a 3% loss today, investors everywhere are questioning just how long and severe this bear market could be.
A bear market is defined by an at least 20% drop from a recent peak. Since its all-time high of $4,766 in December, the S&P is down about 21% at the time of writing, hovering around $3,789.77. A host of recessionary forces are pushing stocks down today.
Friday’s Consumer Price Index (CPI) report remains top of mind for many investors, as it seems likely the Federal Reserve will continue its hawkish agenda. The May CPI report detailed an 8.6% inflation jump from the same month last year. Additionally, it indicated a 1% month-over-month jump. This was higher than even liberal predictions of an 8.3% year-over-year increase. It’s no surprise to see investors react to the startling report, especially given how prices eased mildly in April.
The issue with higher inflation is that it will inevitably beget a monetary policy response that will tighten up financial markets even further. The Federal Reserve hasn’t been shy about its commitment to lowering prices — at nearly any cost. While the Fed has been steady with its 50-basis-point interest rate hikes, some view last month’s rampant inflation as a reason the central bank will end up pushing through larger hikes of 75 or even 100 basis points. And many investors believe the hikes may come more rapidly than previously expected. Higher interest rates could further slow economic growth, especially for typically highly leveraged tech and growth stocks.
Bear Market Weighs on Investors Amid Crypto Crash
Today’s drop could also be due in part to the recent crypto crash. Flagship coins like Bitcoin (BTC-USD) and Ethereum (ETH-USD) are down more than 15% over the past 24 hours. Most of the other top cryptos by market capitalization have followed suit. BTC has been on a downward spiral this year, and today’s drop certainly isn’t helping the crypto bulls of the world. Bitcoin’s all-time high was about $67,000 per coin last November. At the time of writing, it’s down to $23,623, even below its most recent $29,000 resistance level.
As stocks become more intertwined with digital assets, it’s not surprising to see both markets experience drops today. MicroStrategy (NASDAQ:MSTR), for example, has a massive holding in crypto, and as a result is down more than 21% today at the time of writing.
It’s unclear what today’s official passing into bear market territory will mean for the greater stock market. With China opening back up, American industries are in position to regain lost ground. But they are still at odds with rampant inflation and rising interest rates.
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