Stock futures rebound, but traders remain wary as S&P 500 drops into bear market

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An intense selloff hit Wall Street on Monday as traders got rattled by worries of entrenched inflation and a possible recession. The S&P 500 slumped nearly 4% to enter a bear market, now off more than 21% from its record in January. The rout even hit the energy industry (a rare segment that has performed well in 2022), while cooling valuations rocked the risky crypto sector (Bitcoin tumbled below $21,000) and Treasury yields spiked to levels not seen in a decade (10-year jumped 28 bps to 3.44%).

Bigger picture: While the S&P 500 hit the bear threshold in May, the benchmark index quickly rebounded within the same day and has avoided closing in bear territory over the past month. Some similar price action can be seen this time around, with S&P 500 futures rallying 1% early Tuesday, though many analysts caution that things could be different this time around. “We’re definitely seeing a risk-off atmosphere, a flight to quality,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “In that environment, people need to raise cash.”

The selloff came just in time for the latest Fed meeting, which will see FOMC officials meet over the next two days and announce policy changes and economic forecasts on Wednesday. Expectations over the past month priced in a half a percentage point rate hike, but an upshift transpired following the elevated CPI reading seen on Friday. Traders now see a 99.8% chance of a 75-basis-point move, according to the CME Group’s FedWatch tool that measures pricing in the fed funds futures markets.

Behind the curve: “What we need to see is clear and convincing evidence that inflation pressures are abating and inflation is coming down. And if we don’t see that, then we’ll have to consider moving more aggressively,” Fed Chair Jerome Powell said at a recent Wall Street Journal conference. The central bank raised rates by a half percentage point at its meeting in May – marking the first such increase since 2000 – to a range between 0.75% and 1%. The last time the Fed raised rates by 0.75 percentage points was at a meeting in 1994, when the central bank rapidly raised rates to stave off a potential rise in inflation.