Stocks’ sell-offs intensified after weak consumer spending data fueled concerns about a recession, with the S&P 500 undergoing its cruellest first half since Richard Nixon’s presidency.
It was a defeat for the history books, with the benchmark falling 21% in the first six months of the year – the most for such a period since 1970. The superlatives continued to pile up on Wall Street, with 10-year US dollar yields plunged to about 3% from a ten-year high of 3.5% in mid-June. The dollar had its best quarter since 2016. Bitcoin’s nearly 60% drop since late March was the largest since the third quarter of 2011.
US consumer spending fell for the first time this year, pointing to an economy that is somewhat weaker than previously thought amid rapid inflation and increases from the Federal Reserve. The view that central banks must act quickly because they misjudged inflation has shaken markets, with traders risking the economy succumbing to aggressive tightening.
“The stagflation that currently grips our country will make it difficult for the stock market in the medium term,” said Matt Maley, chief market strategist at Miller Tabak. “If demand isn’t the main reason why inflation is a problem, a slower economy won’t help lower inflation as much as some experts seem to think.”
Key segments of the world’s largest bond market — such as the differential between five- and 10-year yields — have reversed, suggesting that higher yields are hurting the economy. Inversions have generally preceded recessions by about six to 18 months, according to data collected by Bloomberg.
According to Greg Marcus, managing director at UBS Private Wealth Management, July will be crucial for the future direction of the markets amid corporate earnings, key inflation data and the Fed meeting, after a difficult first half of the year. He says volatility is likely to remain high until there is evidence that inflation is moderating, recession risks are abating and geopolitical threats are abating.
In recent months, a strategy that has worked well for a decade has hit new lows in the market. Traders have shunned the “buy-the-dip” mantra while embracing the “sell-the-rally” mode. As a result, the S&P 500 entered a bear market for the second time since 2020, falling more than 20% from its January peak.
But dismal performance is no indication of what’s to come. The US stock benchmark lost 21% in the first half of 1970, during a period of high inflation to which the current environment has been compared. It increased by 27% during the last six months of that year.
“We will have double-digit returns between now and the end of the year,” Jonathan Golub, head of US equity strategy at Credit Suisse, told Bloomberg Television. “We don’t have as much of a profit problem as people say.”
Earlier this week, strategists at Goldman Sachs Group Inc. Profit margins in the US are much too optimistic, putting stocks at risk of further declines if Wall Street analysts lower their expectations. Morgan Stanley’s Lisa Shalett said on Monday that analysts need a reality check on their earnings forecast for this quarter.
Elsewhere, oil suffered its first monthly decline since November as OPEC+ completed the return of output that it stalled during the pandemic. Gold fell for the third straight month.
What to watch this week:
- Eurozone CPI, Friday
- US Construction Spending, ISM Manufacturing, Friday
Some of the key moves in markets:
- The S&P 500 fell 0.9% as of 4 p.m. New York time
- The Nasdaq 100 fell 1.3%
- The Dow Jones Industrial Average fell 0.8%
- The MSCI World Index fell 1%
- The Bloomberg Dollar Spot Index fell 0.4%
- The euro rose 0.4% to $1.0481
- The British pound rose 0.4% to $1.2173
- The Japanese yen rose 0.6% to 135.74 per dollar
- 10-Year Treasury yield fell by seven basis points to 3.02%
- German 10-year yield fell 18 basis points to 1.34%
- UK 10-year yield fell 16 basis points to 2.23%
- West Texas Intermediate crude fell 3.6% to $105.82 a barrel
- Gold futures fell 0.6% to $1,807.30 an ounce
–With the help of Andreea Papuc, Denitsa Tsekova, Cecile Gutscher, Lu Wang, Elaine Chen, Isabelle Lee, Vildana Hajric and Enrique Roces.