The stock market entered 2022 at record levels. Since then, though, global risk appetite has been cobbled by a combination of soaring inflation, rising interest rates, and fears of a looming recession. These economic headwinds have sent global stocks careening significantly lower.
Why Is the Stock Market Falling?
As of Monday June 13, the S&P 500 is officially in bear market territory, which is defined as a drop of more than 20% from the most recent high. The S&P 500 is trading below 3,800—down 21.5% from early January highs. If there is a silver lining, its that the S&P 500 is still up approximately 10% from it’s February 2020 highs, or just before the COVID-19-fuelled stock market crash.
Other major indices are doing poorly too. The Nasdaq is deep in bear market territory, down a whopping 33% from its November 2021 highs. Even the Dow Jones Industrial Average, which is a price-weighted index of the 30 large, publicly-owned blue chip stocks, is flirting with bear market territory, down 17% from its January highs.
Stocks climbed at the end of May as inflation and recessionary fears had tapered off. But a raft of economic data over the last week have renewed economic fears. On June 10, the Consumer Price Index showed that U.S. inflation was significantly higher than what analysts were expecting; 8.6%, the highest level since 1981.
The same day, Statistics Canada announced that the unemployment rate had fallen to a new low of 5.1%. On top of that, the tight labour market was putting pressure on wages. The Canadian inflation rate is soaring too, at 6.8%, the highest level in 31 years.
This perfect storm is making it difficult for central banks to control inflation. To combat inflation, it is expected the Bank of Canada will need to continue to aggressively hike its interest rates, with the risk of a 75-basis point hike in July. That would increase the overnight lending rate to 2.25%.
Meanwhile, in the U.S., it was expected that Federal Reserve would implement at least two more 50-basis point rate hikes. But with inflation running hot, Wall Street is betting the U.S. central bank will hike its interest rates by 75 basis points. A rate hike that big would cement concerns that the Federal Reserve is really worried about inflation. The last time the Federal Reserve hiked its rates by 75 points was back in November 1994.
With All This Uncertainty Should Investors Wait on the Sidelines?
With stocks cratering and inflation at 40-year highs, investors may be thinking it makes sense to just sit on the sidelines and wait for the markets to turn. First, it’s impossible to time when the stock market is going to bottom and find the so-called perfect time to jump in.
Second, because of soaring inflation, the cost of everything is way up which means the purchasing power of that cash is being chipped at every day. In this environment, your money will have less buying power tomorrow than it does today. And the difference between income generated in a typical savings account and what’s needed to beat inflation has rarely been greater.
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The S&P 500 and Nasdaq are both in bear market territory and inflation is still accelerating, sparking fears of a recession. The sharp escalation in inflation will force central banks to announce another oversized increase in its lending rate, which will further juice interest rates, curb consumer spending and increase debt levels. Instead of sitting on cash, the trading experts at Learn-To-Trade.com can teach investors how to profit whether stocks are going up, down, or sideways.
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