The Dow (INDU) fell 825 points, or 2.7%, and the Nasdaq fell 4.3%.
The broader S&P 500 fell 3.6%. This index is now more than 20% below its all-time high set in January, putting stocks in bearish territory.
Fears of inflation and recession had eased somewhat by the end of May, and stocks regained some ground. But the miserable report from the Consumer Price Index on Friday showed that US inflation was significantly higher than economists expected last month, which could hamper Federal Reserve inflation control efforts .
After raising interest rates by half a point in May, an action the Fed had not taken since 2000, President Jerome Powell promised more of the same until the central bank was satisfied that inflation was under control. At that point, the Fed would resume standard quarter-point hikes, he said.
But after the hottest inflation report expected in May, Wall Street is increasingly calling for tougher Fed action to keep prices under control. Jefferies joined Barclays on Monday to predict that the Federal Reserve would raise rates by three-quarters of a percentage point, an action the Fed has not taken since 1994.
“After holding its breath for nearly a week awaiting the May U.S. CPI report, investors exhaled in exasperation as inflation rose more than expected,” said Sam Stovall, strategist at CFRA Chief Investments, in a note to clients Monday morning.
Stovall said the risk of higher rises is dragging markets lower on Monday.
Investors fear two results, none of them good: higher rates mean higher borrowing costs for companies, which can affect their results. And overly enthusiastic Fed action could plunge the U.S. economy into an unintentional recession, especially if companies start firing workers and the housing market collapses.
There is no indication that the labor and housing markets are in danger of collapsing, although both are cooling slightly.
In an interview with CNN’s Fareed Zakaria on Sunday, former Fed Chairman Ben Bernanke said a recession in the United States is still possible. But Bernanke said he had faith that Powell and the Fed could achieve the so-called soft landing, the dodging result in which the central bank can cool the economy to control inflation without slowing it so much that it goes into recession.
“Economists are very bad at predicting recessions, but I think the Fed has a decent chance, a reasonable chance, of getting what Powell calls a ‘soft landing’, no recession or a very mild recession for reduce inflation “. said Bernanke.
Bears and bulls
If the S&P 500 closes in a bearish market, the uptrend that began on March 23, 2020 will have come to an end. But because of the complicated way of measuring these things, the bear market will have started on January 3, when the S&P 500 reached its all-time high.
That would mean that the last bullish market lasted just over 21 months, the shortest on record, according to Howard Silverblatt, senior analyst at S&P Dow Jones Indices. Over the past century, bullish markets have averaged about 60 months.
The shorter bullish market will have followed the shorter bearish market, one that lasted just over a month, from February 19 to March 23, 2020. Historically, the bearish markets last an average of 19 months, according to Silverblatt.
Shares fell briefly in a bearish market on May 20, although a rebound at the end of the day rescued the market from closing below that threshold for the first time since the early days of the pandemic.
The high-tech Nasdaq has long been in a bear market and is now 32% below its all-time high set in November 2021. The Dow is still far from a bear market. It has fallen by 15% from its all-time high on the last day of 2021.