On Friday, the S&P 500 index reported its 10th weekly decline in the last 11 weeks and has now entered the bear market territory. A bear market represents a pullback of over 20% in a particular stock index from all-time highs.
Right now, the S&P 500 index has fallen 23.4% from record levels while the tech-heavy Nasdaq Composite index has pulled back by 32%. Comparatively, the Dow Jones Industrial Average index is down 18.3% in 2022.
Last week, the Federal Reserve hiked interest rates by 0.75% which was the biggest increase since 1994. There is a good chance the central bank will remain aggressive going forward given inflation numbers are still elevated.
In an investor note, Ajay Singh Kapur, equity strategist from Bank of America (NYSE: BAC) emphasized investors should stop fighting the Fed and put an end to the buy-the-dip mentality.
According to Kapur, “In a bear market, heroism is punished. Valor is unnecessary, and cowardice is called for in portfolio construction — that is the way to preserve capital and live to fight another day, waiting for the next central bank panic, and better valuations and a new earnings upcycle.”
Technology stocks have been pummeled as they are sensitive to interest rate hikes. Additionally, cyclical stocks in the airlines and cruise lines sector have also underperformed in recent months.
The equity market sell-off has driven cryptocurrencies lower as Bitcoin slumped over 30% in the last week. Right now, the BTC token is trading at $19,700 after briefly slumping to below $18,000. As interest rates have risen, investors are shifting capital towards lower-risk assets such as bonds.
While stock market indices rallied on Wednesday after the Fed’s announcement, the optimism was quickly reversed the following day. Several experts believe market sentiments to be subdued resulting in another round of sell-off in the upcoming week.
Is a recession on the horizon?
A hawkish stance by the Fed and a challenging macro environment might lead to an economic recession in 2023. Higher bond yields are already pushing housing stats lower while consumer sentiment is also near record lows. Rising oil prices and lay-offs at tech companies have added to the pessimism surrounding the stock market.
Bank of America’s global economist, Ethan Harris emphasized the U.S. economy is one revision away from a recession. Harris stated, “Our worst fears around the Fed have been confirmed: they fell way behind the curve and are now playing a dangerous game of catch up. We look for GDP growth to slow to almost zero, inflation to settle at around 3% and the Fed to hike rates above 4%.”
According to JPMorgan (NYSE: JPM), there is a 63% chance of a recession in the next two years and an 81% chance for a recession to occur within the next three years.
It's quite evident that the Federal Reserve is willing to risk the possibility of a recession in order to lower inflation to reasonable levels.
The upcoming week is relatively light in terms of economic events as the U.S. markets will be closed on Monday. Investors will be provided with insights into the U.S. economy as stocks such as FedEx (NYSE: FDX) and Lennar (NYSE: LEN) will be reporting earnings this week.