Dow Jones drops sharply as Wall Street fears aggressive Fed action

The daw (INDU) It sank 876 points, or 2.8%. The Nasdaq is down 4.7% and down more than 10% in the past two trading sessions.

The Standard & Poor’s 500 Index fell 3.9 percent. The index is now down more than 20% from its all-time high in January, putting stocks in a bear market.

inflation and Recession fears It fell somewhat at the end of May, and stocks regained some of their gains. But Friday’s miserable CPI report showed that US inflation was much higher than economists had expected last month, which could make the Federal Reserve Efforts to control inflation more difficult.

After raising interest rates by half a point in May – a measure the Fed has not taken since 2000 – President Jerome Powell pledged more of the same until the central bank was convinced inflation was under control. At that point, he said, the Fed would resume record quarter-point increases.

But after the hotter-than-expected inflation report in May, Wall Street is rising Calls for tougher action From the Federal Reserve to keep prices in check. Jefferies joined Barclays on Monday in expecting the Federal Reserve to raise interest rates by Three quarters of a percentage pointwhich is a Federal Reserve action He hasn’t taken it since 1994.

“After holding their breath for nearly a week awaiting the US CPI report for May, investors were furious as inflation came in more than expected,” Sam Stovall, chief investment analyst at CFRA, said in a note to clients Monday morning.

Stovall said the risks of big upsides are driving markets lower on Monday.

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Investors fear two outcomes, but neither is good: Higher rates mean greater borrowing costs for companies, which could eat into their bottom line. And an overzealous act on the part of the Federal Reserve could inadvertently push the US economy into a recession, especially if companies start laying off workers and an overheated housing market collapses.

There is no indication that the labor and housing markets are in danger of collapsing, although both have calmed somewhat.

In an interview with Fareed Zakaria on CNN SundayFormer Federal Reserve Chairman Ben Bernanke said a recession in the US is still possible. But Bernanke said he believes Powell and the Fed can achieve a so-called soft landing, the elusive outcome in which the central bank can cool the economy to control inflation without slowing it down so much that it enters a recession.

“Economists are very bad at predicting recessions, but I think the Fed has a good chance – a reasonable chance – of making what Powell calls a ‘soft landing,’ either a no-recession or a very mild slump to bring down inflation,” Bernanke said.

Analysts seemed to outgrow their “buy on dip” mentality on Monday, indicating that they are not seeing markets recover quickly.

“Valuations are not much cheaper given higher interest rates and a weaker earnings outlook, in our view,” BlackRock strategists wrote in notes on Monday. “The higher path of policy rates justifies lower stock prices. Plus, margin pressures pose a risk to earnings.”

Analysts said BlackRock will remain neutral on the stock for the next six to twelve months.

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bears and bulls

The S&P 500 closed in a bear market, so the uptrend that started on March 23, 2020. But because of the difficult way these things are measured, the bear market technically began on January 3, when the S&P 500 reached an all-time high. .

That means the recent bull market lasted just over 21 months — the shortest on record, according to Howard Silverblatt, chief analyst at S&P Dow Jones Indices. Over the past century, bull markets have lasted an average of about 60 months.

The shortest bull market followed the shortest bear market, one that lasted just over a month – from February 19 to March 23, 2020. Historically bear markets last an average of 19 months, according to Silverblatt.

Stores Fell briefly in a bear market On May 20, though, a rally late in the day saved the market from closing below that limit for the first time since the early days of the pandemic.

The tech-heavy Nasdaq has been in a bear market for some time and is now more than 32% below its all-time high in November 2021. The Dow is still far from a bear market. It is down about 16% from its all-time high on the last day of 2021.

CNN Business’s Nicole Goodkind contributed to this report

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