Wall Street is having its worst week since March 2020

A tumultuous week on Wall Street, which began with stocks plunging into a bear market for the second time during the pandemic, ended with a small gain on Friday. That was little comfort after a brutal period for investors, who saw the value of their portfolios and retirement funds plummet.

The S&P 500 rose 0.2% on Friday but ended the week with a 5.8% loss, its 10th decline in the past 11 weeks and its worst weekly performance since March 2020 – when stocks slumped then as the coronavirus was spreading around the world and investors feared for the global economy.

This time the selloff was fueled by persistently high inflation, which is eroding people’s purchasing power and reducing corporate profits, and growing sentiment that the Federal Reserve’s efforts to push it back with interest rates higher interest will stifle growth. By making it more expensive to borrow to buy a home, invest in a business, or do just about anything else with debt, the Fed can cool demand and slow price gains, but if it goes too far, it can tip the economy into a recession.

Wall Street has been on edge for months, but the mood darkened significantly after the government released its latest consumer price index reading last Friday. It showed inflation accelerating again in May, with prices rising at an annual rate of 8.6%. Some investors had begun to expect inflation to slow, and the report dismissed them from that view.

On Monday, the panic over the economy was on full display and stocks plunged nearly 4%, a drop fomented in part by news that the Fed was considering an unusually large rate hike at its meeting later. during the week. Monday’s decline left the S&P 500 down more than 20% from its January peak and in its seventh bear market in the past 50 years.

“It’s all part of a story, which is inflation,” said Aswath Damodaran, a finance professor at New York University. “Until we know where we’re going to end up in inflation, you’re going to see high days and low days that are important.”

On Wednesday, when the central bank raised its key rate by 0.75 percentage points, the largest one-time increase since 1994, stocks soared. Investors seemed to take solace in assurances from Fed Chairman Jerome H. Powell that policymakers were “not trying to cause a recession.”

The feeling didn’t last. Another sharp drop on Thursday, of more than 3%, reflected fears that a more aggressive Fed could, in fact, induce a recession.

Analysts say the turmoil is unlikely to end until investors see signs that inflation has started to peak – or until the Fed starts signaling the end of its campaign to fight the rise prices. This is probably a distant result.

On Friday, Mr Powell said he and his colleagues were “extremely focused on getting inflation back to our 2% target”, citing a level well below current inflation rates.

Investors – who have turned away from relief that policymakers are taking aggressive action to rein in inflation for fear of the effect those actions could have on economic growth – are betting the swings are here to stay. The VIX Volatility Index, commonly referred to as the “fear index”, is one measure of this because it tracks investor demand for a type of financial instrument that offers protection against market downturns. It has more than doubled over the past year.

The sale of shares was very varied. Of 11 S&P 500 company sectors, 10 are in the red for the year. Only the energy companies, as a group, are higher. Their gains came as the price of oil and gas soared, first as people resumed many pre-Covid activities and then as Russian energy became untouchable after its invasion of Ukraine.

Stocks are perhaps the most widely understood measure of financial sentiment, but other markets have also taken a beating.

Cryptocurrencies, which some believe should serve as a safe haven in times of inflation and turmoil, have had a torrid time. Bitcoin lost nearly 30% of its value this week alone, falling to its lowest level since 2020. Some of the biggest players in the crypto industry, like Coinbase, Gemini, and Crypto.com, announced layoffs. Celsius, an experimental crypto bank, abruptly halted withdrawals.

With cryptocurrencies and stocks, investors may lose a lot more money before things get better.

“There’s a lot more pain left,” Mr Damodaran said.

Julio V. Miller