After months of rising inflation, the S&P 500 it eventually broke into bear market territory, ending a more than two-year COVID recovery bull run.
The catalyst, of course, was Friday’s stunning revelation that consumer prices soared 8.6% in March, a report so toxic Wall Street was still digesting it today.
“The hot inflation report provided a double dose of bad news for the economy and equities,” says Paul Christopher, director of global market strategy at the Wells Fargo Investment Institute. “First, it increased pressure on real (inflation-adjusted) household income, and second, it stoked the debate about more aggressive rate hikes by the Fed beyond the expected two half-percentage-point hikes next week.” week and the end of the July Policy Meeting…Interest rate futures contracts are now pricing in a third half percentage point rate increase at the September 20-21 policy meeting.”
And indeed, some pundits have warned that the Fed could pull the reins even further at this week’s Federal Open Market Committee (FOMC) meeting.
Sign up for Kiplinger’s FREE weekly investing e-newsletter for stock, ETF and mutual fund recommendations and other investment advice.
“With cost pressures showing no signs of easing, a 75bps move at this week’s FOMC meeting cannot be ruled out,” says Priscilla Thiagamoorthy, economist at BMO Capital Markets.
Bond traders seemed to think that was a distinct possibility, as the 10 year Treasury sold out on monday hard. That sent its yield down to 3.35% (remember: bond prices and yields move in opposite directions), surpassing a 2018 peak to hit its highest rate since 2011.
Furthermore, the performance of the Treasury two years briefly surpassed the 10-year mark, a “yield curve inversion” that often signals an impending recession.
the S&P 500 fell 3.9% to 3,749, down 21.8% from its January 3 closing high of 4,796, ending the bull market that began on March 23, 2020. Nasdaq Composite (-4.7% to 10,809) retreated further into bear market territory, and the Dow Jones Industrial Average (-2.8% to 30,516) would need to drop another 4.0% to join its fellow indices.
Other news in the stock market today:
- the small cap Russell 2000 it fell 4.8% to 1,714.
- us crude oil futures managed to get a small improvement of 0.2%, to $120.93 per barrel.
- gold futures It fell 2.3% to $1,831.80 an ounce as the US dollar continued to gain strength.
- Bitcoin melted over the weekend, bleeding 20% from last Friday afternoon at $23,155.20. “Cryptocurrency fans have grown accustomed to volatile rides, but these rollercoaster rides are getting harder to stomach,” says Susannah Streeter, senior investment and markets analyst at UK financial firm Hargreaves Lansdown. (Bitcoin operates 24 hours a day; prices reported here are as of 4 pm)
- Revlon (REV) fell 43.2% after The Wall Street Journal on Friday night suggested the makeup company is preparing to file for Chapter 11 bankruptcy. The article, citing people familiar with the matter, indicates a filing could come as early as this week.
Zendesk (ZEN) fell 7.9% after Morgan Stanley analyst Elizabeth Porter downgraded the software developer stock to Equal Weight from Overweight, the equivalents of Hold and Buy, respectively. This comes after the company completed its strategic review without finding suitable parties to acquire. Porter said this took a “key catalyst off the table” for tech stocks.
Fight this bear with ETFs
Some investors are surely stuck in strategic purgatory. Are you reveling in this drop, expecting stocks to pull back violently like they did in the spring of 2020 and the first quarter of 2019? Or do you wait for the market to further price in an expected litany of interest rate hikes and the possibility of continued high inflation?
Wall Street isn’t sure. For example, Chris Larkin, managing director of trading at E*Trade, says that “investors shouldn’t be too discouraged…over the last six decades, when the SPX officially entered bear territory, selling was generally closer to its end than its beginning.” However, the BlackRock Investment Institute says that we “put aside” buying this dip, as “a higher path of policy rates justifies lower share prices.”
But if your instincts are to protect your backside, you can find all the tools you need in your brokerage account. We recently highlighted 10 highly-rated defensive stocks that should hold up well in a bear market, and today, for those who want to add some diversification to their hedges, we’re exploring a dozen of the best bear market exchange-traded funds (ETFs).
These funds run the gamut from simple hedge stock portfolios to exotic bond market options, all in the hope of losing less than the market or, ideally, recording some black ink. Look at them: