Wall Street enters bear market on inflation, rate fears

Fears central banks will lift rates to curb surging inflation pushes US shares into a bear market for the first time in over two years with the S&P 500 down 3.9 per cent.

Fears of interest rates and inflation push US shares into bear-market territory. Photographer: Michael Nagle/Bloomberg

Fears central banks will lift interest rates rapidly to curb rising and increasingly out of control inflation, crushing economic growth, have pushed US shares into a bear market for the first time in more than two years.

The blue-chip S&P 500 share market index dropped 3.9 per cent in trading on Monday (Tuesday AEST), leaving the closely watched barometer of US corporate value more than 21 per cent down on its level in January – more than the 20 per cent required for a ‘bear market’.

“This is what you call a bear market where fear is taking place and pushing people out of the market and having people empty up portfolios and capitulate,” Todd Morgan, the chairman of Los Angeles-based Bel Air Investment Advisors, told the Wall Street Journal.

News on Friday that the US inflation rate rose to 8.6 per cent over the year to May, a 41-year high, defying widespread expectations inflation would begin to decline from its recent peak of 8.5 per cent set in March, bolstered the risk of recession and pushed up US bond yields to the highest level in a decade.

“We’re in a brave new world right now. I don’t think anyone can accurately predict inflation one year from now,” Morgan Stanley global CEO James Gorman, an Australian, said at a conference Monday.

The tech-focused and more volatile Nasdaq index, which met the bear market criteria in March, dropped 4.7 per cent.

“It seems as though inflation is staying for longer than expected,” Kiran Ganesh, a multi-asset strategist at UBS, told The Wall Street Journal. “People are now beginning to fear that the Fed will have to go further or faster in terms of interest rates.”

The US Federal Reserve, repeatedly wrong-footed by the resilience and strength of US inflation which it had earlier declared ‘transitory’, is expected to lift the benchmark federal funds rate 0.5 percentage points to 1.5 per cent at the end of its two-day monetary policy meeting on Wednesday.

“The very fact that it overshot expectations has really frayed investors’ nerves even more and shown how difficult it is to try to keep a lid on inflation,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, told the Wall Street Journal.

“The worry is that inflation is getting too hot to handle for central banks and they’ll have to dose economies with cold water in the form of tighter policy.”

The chance the Fed, which has repeatedly telegraphed an intention to lift its official rate by 0.5 percentage points at each of its June and policy July meetings, will instead lift the rate by 0.75 percentage points this week has leapt from 3 per cent to 33 per cent, according to prices in futures markets.

The yield on the 10-year US government bonds rose to 3.325 per cent from 3.156 per cent during trade on Monday, putting it on track for its highest closing level since 2011.

Central banks around the world, including Australia, have started to lift their official rates more rapidly than they had been accustomed in previous years, as they similarly battle inflation many times greater than their respective inflation targets.

The previous US bear market occurred in March and April 2020, when the S&P 500 dropped around 34 per cent between amid fears about the impact of the Covid-19 pandemic on the global economy.

The share market follows news the US economy shrank in the first quarter of 2022, increase the chance the US will meet the widely held definition, which is two successive quarters of negative growth.