NEW YORK: The US stock market's brutal year reached a grim milestone as the S&P 500's slide on Monday (Jun 13) confirmed a bear market for the first time since March 2020, fuelled by worries over sky-high inflation, a hawkish Federal Reserve and future economic growth.
With a 3.9 per cent drop on Monday, the benchmark S&P 500 index ended 21.8 per cent below its Jan 3 record closing high. By falling at least 20 per cent from its peak, the index confirmed a bear market, under a common definition used by market watchers.
If history is any guide, a bear market would mean more pain could be in store for investors.
The S&P 500 has fallen by an average of 32.7 per cent in 13 bear markets since 1946, including a nearly 57 per cent drop during the 2007-2009 bear market during the financial crisis, according to Sam Stovall, chief investment strategist at CFRA.
It has taken a little over a year on average for the index to reach its bottom during bear markets, and then roughly another two years to return to its prior high, according to CFRA.
Of the 13 bear markets since 1946, the return to breakeven levels has varied, taking as little as three months to as long as 69 months.
"The Fed said it has got inflation under control. The Fed doesn't have it under control, and they could have lost control," said Ken Polcari, chief market strategist at SlateStone Wealth in Florida.
"I don't see panic selling yet, but it feels like it's coming," Polcari said, adding that a fall below 3,800 points in the S&P 500 index could spur more investors to flee equities.
The Dow Jones Industrial Average tumbled 2.8 per cent and the Nasdaq Composite plunged 4.7 per cent.
As speculation simmers that the Fed could hike interest rates by 75 basis points at its Jun 14 to Jun 15 policy meeting this week, markets ratcheted up expectations that US rates would peak at around 4 per cent next year, up an eye-watering 100 basis points from less than two weeks ago.
Investors are trying to predict where benchmark policy rates could peak in the United States and other major economies, as that would help determine equity valuations and how much further share prices could fall.
European shares tumbled 2.4 per cent to their lowest in more than three months, and the euro STOXX volatility index - an equivalent in Europe of the US VIX index, also known as Wall Street's fear gauge - surged to a one-month high. The US VIX index also leapt to its highest in more than a month.
Benchmarks in many countries including the Netherlands have suffered declines of more than 20 per cent from a recent closing peak.
"This is happening in spite of the actions that have so far been taken by central banks ... stoking fears that they will have to go harder and faster if inflation is to be tamed, the cost of which is being increasingly seen as lower growth and potentially recession," Equiti Capital chief macro strategist Stuart Cole said.
With inflationary trends showing no signs of abating and new mass COVID-19 testing in China sparking concerns about more crippling lockdowns and squeezed global supply chains, investors cut exposure to risky assets across the board.
Credit default swap spreads blew out to multi-year highs, while cryptocurrencies including Bitcoin and ether posted double-digit losses, as news that US crytocurrency lending company Celsius Network had frozen withdrawals spooked investors.
European bonds were also caught in the broadening debt market sell-off following a hawkish European Central Bank meeting last week, with two-year German bond yields galloping above 1 per cent for the first time in more than a decade.
Rising US yields and the flight to safety pushed the dollar index, which measures the value of the greenback against six major currencies, to a high last seen in December 2002. By late afternoon, the index was up 0.7 per cent at 105.18.
Against the yen, the dollar retreated from Monday's peak of 135.22 yen, a level not seen since October 1998, while the British pound sank 1.5 per cent after data showed that the United Kingdom economy unexpectedly shrank in April.
This is a big week for central banks with the Fed, Bank of England and Swiss National Bank holding policy meetings.
Expectations of even more aggressive rate hikes from central banks around the world have led investors to sour on the global growth outlook.
Multiple indicators of growth in markets slumped on Monday from technology shares in Hong Kong to the Australian dollar, as investors fled to the perceived safe haven of the US dollar.
Investors in Asia focused on the risk of new coronavirus lockdowns, with Beijing's most populous district of Chaoyang announcing three rounds of mass testing to quell a "ferocious" outbreak that emerged at a bar.
Chinese blue chips fell 1.17 per cent and Hong Kong's Hang Seng suffered a 3.39 per cent slide. Japan's Nikkei slumped 3.01 per cent and South Korea's KOSPI shed 3.52 per cent.
"Anyone trying to pick the bottom in China's growth and equity markets on the basis that China was 'one and done' on lockdowns is naive," said Jeffrey Halley, senior market analyst at OANDA.
China's growth shares sagged, with tech giants listed in Hong Kong slumping 4.45 per cent. Index heavyweights Alibaba, Tencent and Meituan were each down between 4 per cent and 6 per cent.
Leading cryptocurrency Bitcoin sank 11.7 per cent to the lowest since December 2020 at US$23,462.
Meanwhile, crude oil prices whipsawed between gains and losses, as investors weighed the impact of tight global supplies on softening demand as the world economy cools. For the day, Brent crude futures settled up 0.21 per cent at US$122.27 a barrel.