Risk Off, Way Off: Market Trips the Bear Trap as Investors Run for Safer Ground

S&P 500 closes volatile session in bear market territory as continued inflation and rate worries chill the market.

5 min read
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Key Takeaways

  • S&P 500 Now in a Bear Market as Inflation, Recession Worries Set the Stage for Fed’s Wednesday Rate Decision 

  • It’s All About the Basics: Gasoline Prices, Rising Mortgage Rates Capture Investor, Consumer Attention 

  • Economic Data from China, EU Will Also Drive This Week’s Narrative 

Shawn Cruz Director of Derivative Strategy, TD Ameritrade

(Monday Market Close) After digesting Friday’s dismal inflation report and considering more economic headwinds ahead, investors sold out of all major indexes and sectors by the close, leaving the S&P 500 (SPX) down nearly 4% and officially in bear territory.

From tech to cryptocurrency, investors leapt to safety ahead of tomorrow’s Producer Price Index (PPI) report, Wednesday’s Federal Reserve rate announcement, and Friday’s triple witching hour. The S&P 500 fell 3.87% to finish at 3,748.81, the Nasdaq Composite ($COMP) lost 4.68%, and the Dow Jones Industrial Average ($DJI) slid 876 points for a loss of 2.79% on the day.

Good news was tough to find. To start the week, gasoline prices finally hit an all-time nationwide average high of $5 per gallon while 30-year mortgage rates approached 6%, nearly double year-ago levels. On Friday, the government reported higher-than-expected Consumer Price Index (CPI) data that revealed inflation had jumped a full percent since the end of April, speeding past analysts’ 0.7% forecasted increase and dwarfing April’s 0.3% gain. 

To indicate how little investors were willing to risk in this environment, the price of bitcoin plunged below $23,000 on Monday, trading nearly 70% below its November highs at one point in the session.

Yields captured the market’s attention as the 10-year Treasury yield (TNX) briefly inverted with the 2-year Treasury before today’s open. Seen by many as a recession indicator, it was the second inversion since April. The 10-year rose to 3.387%, while the 2-year finished at 3.383% after the close.

Wednesday’s Federal Open Market Committee rate announcement—and Chairman Jerome Powell’s comments immediately afterward—will likely define this week’s economic news, but they’ll be far from the only events investors will want to watch. Overnight, industrial production and retail sales figures are expected from China, and Germany will be offering its own inflation forecast as a barometer of the European Union’s economic health.

While analysts are speculating that the Fed may increase its expected rate hikes above the 50-basis-point level in the coming months, it’s unclear whether the central bank plans to become more hawkish beyond its previous public statements.

After the close, Oracle (ORCL) rose nearly 9% in extended trading after a better-than-expected earnings report. 

CHART OF THE DAY: NOT-SO-GREAT EXPECTATIONS. Consumer expectations for inflation and spending in the coming year hit record levels in May, reflecting prices that galloped at their highest level in 40 years. New York Federal Reserve data showed consumers expect prices to increase 6.6% (blue), up 0.3% from April and tied with March for the highest rate on record back in June 2013. Chart source: New York Fed Survey of Consumer Expectations.

High Anxiety

After a weekend marred by the worst CPI numbers since 1981, today’s data from the New York Fed’s monthly Survey of Consumer Expectations  illustrated how economic negativity can begin at home. The latest numbers showed that consumers are already expecting to spend more in the next 12 months while at the same time observing that credit is getting even tighter. The survey reported that 11.4% of consumers said it was more difficult to get financing in May, compared with 9% the previous month, putting that measure at the highest level since October 2020.

Notable Calendar Items

June 14: Producer Price Index (PPI)

June 15: Retail sales, FOMC interest rate decision

June 16: Building permits, Housing starts, Philadelphia Fed Manufacturing Index, and earnings from Adobe (ADBE), Kroger (KR)

June 20: Markets closed for Juneteenth holiday

June 21: Existing home sales

June 22: Earnings from KB Home (KBH) and H.B. Fuller (FUL) 

Good Trading,

Shawn Cruz

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Key Takeaways

  • S&P 500 Now in a Bear Market as Inflation, Recession Worries Set the Stage for Fed’s Wednesday Rate Decision 

  • It’s All About the Basics: Gasoline Prices, Rising Mortgage Rates Capture Investor, Consumer Attention 

  • Economic Data from China, EU Will Also Drive This Week’s Narrative 

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