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The market rout came as investors grew fearful about red-hot inflation, aggressive central bank tightening and higher recession risk.
Wall Street wrapped up a brutal first half of 2022, as elevated inflation and a hawkish Federal Reserve stoke recession fears. The S&P 500, the broader market index, dropped 20.6 percent year to date, its largest first-half decline since 1970.
The index dropped more than 21 percent from its January record, meeting the criteria for a bear market. A bear market is commonly defined by a fall of at least 20 percent from a recent peak. Meanwhile, the Dow Jones Industrial Average lost more than 15 percent this year, and Nasdaq Composite Index, down 29.5 percent, marking the worst hit.
"It's a very, very, very tough market and one of the most difficult markets I've seen. Everybody's really getting hurt in the market... the sentiment is extremely negative," said Larry Benedict, who has over thirty years of experience as an investment professional.
The market rout came as investors grew fearful about red-hot inflation, aggressive central bank tightening and higher recession risk. The U.S. annual inflation hit a 40-year high of 8.6 percent in May.
The U.S. Commerce Department reported Thursday that the core personal consumption expenditures price index, the Federal Reserve's preferred inflation gauge, rose 4.7 percent in May on a year-over-year basis. While the index was slightly below market estimates, it was still near multi-decade highs and well above the Fed's inflation target of 2 percent.
In June, the Fed accelerated its policy tightening by a 75-basis-point rate hike, the largest increase since 1994, in response to rising inflation expectations and an unexpectedly high CPI print. The U.S. central bank also indicated that a rapid pace of tightening would likely continue at the July meeting. This Fed hawkishness added fuel to market fears that drastic rate hikes may push the U.S. economy into a recession.
Recession expectations were pulled forward yet again this month, as per a DB market survey. "90% expect the next US recession by the end of 2023 or before, with 20% anticipating one this year. That is up from 37% and 2% in January, respectively, and 78% and 13% last month." pic.twitter.com/UtTetbQYAn
In his testimony to U.S. Congress last week, Fed Chair Jerome Powell said that the central bank is trying to bring inflation down without inflicting too much damage, but a recession is "a possibility." He also said a "soft" landing for the U.S. economy would be "very challenging."
Experts warned of higher risk of a U.S. recession, noting that investors should be prepared for continued market volatility. Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in a recent analysis that the chances of a recession ticked higher, "driven by the Fed's latest rate hike and hawkish forward guidance."
"A prolonged, substantial rally seems a bit unlikely as the potential for a U.S. recession remains elevated with investors probably needing more signs of an 'all-clear' before sentiment materially improves," said Shawn Snyder, head of Investment Strategy at Citi Personal Wealth Management.
Benedict said he expects "a bumpy ride" ahead for the market, given a lot of uncertainty regarding the economic outlook. "Worries over both the pace of central bank tightening and growth look set to keep equities volatile," said UBS analysts.
The main driver of markets in the second half of the year will be "investor perceptions of whether we are headed for stagflation, reflation, a soft landing, or a slump," they said.