S&P 500 enters 'bear market' — here's what that means

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The S&P 500 has fallen into a bear market, an indicator that investors are worried about the economy’s future as interest rates rise.

A bear market is a term used to describe an index dropping by at least 20% from a recent high. The S&P 500, which is a basket containing 500 of the biggest U.S. companies, was down 21.3% after open on Monday from its most recent high at the beginning of the year.

The tech-heavy Nasdaq index has already been in bear market territory for quite a while. It is now down more than 31% from the start of the year. The Dow Jones Industrial Average has not yet entered into a bear market, although it was down about 2.5% on Monday and 16.3% since the start of the year.

CONSUMER SENTIMENT PLUNGES TO RECORD LOW AS INFLATION ACCELERATES

The last bear market was a short period of time at the start of the coronavirus pandemic. Prior to the pandemic, the last time the economy experienced a prolonged bear market was during the financial crisis more than a decade ago, which lasted for 517 days.

The market rout accelerated on Friday after the pace of inflation quickened to 8.6% for the 12 months ending in May, according to the consumer price index. Most economic forecasters had predicted that inflation would stay about the same as the previous month, so the upward tick caused a wave of anxiety among investors who fear the Federal Reserve is well behind the curve in battling the higher prices.

U.S. inflation is now the worst it has been since 1981, when the Great Inflation helped bring President Ronald Reagan to office.

Also on Friday, the economy got even more bad news when consumer sentiment sunk to record lows as consumers fret over inflation and what is to come.

The University of Michigan Consumer Sentiment Index plunged to 50.2 in June, down from 58.4 in May, according to preliminary numbers.

The economic uncertainty is also captured by the VIX. The Chicago Board Options Exchange Volatility Index, better known as the VIX, is intended to gauge fear in the markets. The index was up more than 27% in the past five days alone, an enormous jump that illustrates the anxiety investors have about inflation and the potential for economic stagnation. It is up 101% since the start of the year.

This week, the Fed is set to hike interest rates for the third time in four months. Its first rate hike was a quarter-percentage-point increase in March, followed by a more aggressive half-percentage-point hike last month. The Fed is expected to conduct another half-point hike, especially given Friday’s hotter-than-expected inflation reading.

Still, monetary tightening has a far greater influence on the demand side of the equation but does little to combat inflation caused by the supply side. War in Ukraine is roiling energy supplies, and China’s strict coronavirus lockdown policies are exacerbating supply-side problems.

While raising rates depresses demand and should cause the rate of inflation to decrease, it also slows spending. There is concern that the Fed’s more aggressive course of action will knock the economy into a recession.

In an even worse scenario, the central bank could push the economy into a recession while inflation is still high — something called stagflation.

Stagflation, a portmanteau of stagnation and inflation, is when inflation is rising at the same time that economic growth and the labor market are slowing. The term is typically used to describe the economy of the 1970s, when both inflation and unemployment were high. At the time, many top economists thought such a situation was impossible.

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The World Bank said last week that, in some respects, the current economic environment resembles the stagflationary period during the 1970s in that inflation is being fueled by major supply chain disruptions and that global economic growth appears to be weakening.

“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” said World Bank President David Malpass.