The S&P 500 stands at the precipice of a bear market, defined as a 20 percent fall from the most recent high. The broad-based index briefly went there Friday in intraday trading, then powered up 1.9 percent Monday in a broad rally that also lifted the Nasdaq 1.6 percent and the Dow almost 2 percent.
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Analysts said the volatility is rooted in investor uncertainty and fears the U.S. economy could find itself in a recession as the Federal Reserve signals a more aggressive stance on interest rates to get surging inflation under control.
Several leading economists have sounded the alarm that rising interest rates could hurt sectors of the economy. The Fed raised its benchmark interest rate by half a percentage point in May, and five more increases are expected this year. Higher rates generally mean higher borrowing costs for businesses and households. Mortgage rates have been climbing for weeks, and in mid-April a 30-year fixed-rate mortgage surged above 5 percent for the first time since 2011.
That same month, new-home sales fell 16.6 percent, to 591,000, according to Census Bureau data released Tuesday. That’s the fourth consecutive month of declines.
“Plummeting new-home sales is what we see at the start of most economic recessions, and it will be a miracle if the country can avoid another recession coming its way,” FWDBonds chief economist Chris Rupkey said.
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The tech sector posted big losses Tuesday, with Snap plunging more than 43 percent after the messaging app maker warned it would miss second-quarter financial targets amid eroding economic conditions. Snap leaders told employees Monday that the company would rein in hiring and spending in the face of disruptions in the digital ad market, the Wall Street Journal reported. Spooked investors sent Meta Platforms, the parent of Facebook, down 7.6 percent, while Alphabet dropped 5.1 percent. Netflix and Peloton fell 3.6 percent and 7.7 percent, respectively.
David Bahnsen, a Newport Beach, Calif.-based wealth manager, said he sees parallels to the stock market of 2000, in which tech valuations tumbled in an industry-wide reckoning known as the dot-com bust.
“The ‘shiny objects’ of the market, particularly tech stocks that thrived during the pandemic but have no underlying business model, have been most vulnerable, and that vulnerability will continue,” Bahnsen said in an email.
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The retail sector, meanwhile, was pulled lower by a surprise earnings miss from Abercrombie & Fitch, which fell nearly 29 percent. Other apparel brands sold off in tandem; Gap and Lululemon shed 8.3 percent and 5.6 percent, respectively.
“[Wall] Street is worried about a consumer slowdown, and this string of bad news overnight just added fuel to the fire for the bears,” Wedbush Securities managing director Dan Ives said.
Retail losses have been driven largely by rising fuel and compensation costs that are eating into profits and outweighing otherwise strong buying activity.
Best Buy reported lower sales in its first quarter as chief executive Corie Barry cited softer demand and lowered its outlook for the year. Shares added 1.2 percent, however, as the company still managed to beat Wall Street’s expectations, according to CNBC.
The electronics retailer is seeing a pullback after posting outsize growth in the pandemic, according to Moody’s senior vice president Christina Boni. As consumers find pay more for food and fuel, they are cutting back on more discretionary purchases like laptops and flat screen TVs.
Abercrombie & Fitch was hit with a net loss of $10 million despite seeing its strongest first-quarter sales since 2014. The company’s 4 percent sales growth was more than offset by inflation as chief executive Fran Horowitz pointed to higher-than-expected freight and product costs.
“Looking forward, we expect higher costs to remain a head wind through at least year end,” Horowitz said in a news release.
Walmart and Target reported similar problems last week. Walmart’s revenue increased 2.4 percent to $141.6 billion for the quarter, but its favored measure of profit fell nearly 0.9 percent. Chief executive Doug McMillon attributed the loss to higher container and storage expenses, as well as fuel costs that weighed on its logistics network.
Pump prices have been elevated for weeks, after the Russian invasion of Ukraine sent the price of crude oil soaring. West Texas intermediate crude, the U.S. benchmark, stood at about $110 per barrel, up about 50 percent year to date. The national average for a gallon of gas was nearly $4.60 on Tuesday, according to AAA.
“All of this basically says we’re feeling the economic pressure of inflation,” said Michael Farr of the D.C.-based investment firm Farr, Miller and Washington.