June Swoon: U.S. Stocks Slip Into Bear-market Territory As Inflation Concerns Rattle Investors
After months of hand-wringing, U.S. indexes are now in bear-market territory across the board, down 20% from their most recent highs. The downdraft has been led by mega-cap tech, which has plunged 33% from its recent high. The concentration of the market cap of the S&P 500 Index in those mega-cap tech stocks has also led the U.S. equity benchmark into bear-market territory. As of this writing, it is down 22% from its 52-week high, set on Jan. 3.
Inflation worries continue to spook markets
The principal driver of the ongoing weakness in markets continues to be inflation, which has haunted investors for the past several months. Initial observations of very high inflation spooked markets at the beginning of this year, triggering a decline that lasted through early March. The outbreak of the war in the Ukraine in late February helped contribute to this weakness, but ultimately its market impacts dissipated. Most of this year’s market drop took place between early January and early March, with the S&P 500 Index closing down 13.5% on March 8. Since then, equity markets have largely been range-bound, occasionally teetering on the edge of bear-market status before rallying to higher ground.
The May inflation numbers changed that. Most market observers, us included, felt that March’s headline CPI (consumer price index) number of 8.5% would represent peak inflation. And for a while, that seemed to be the case, with year-over-year price increases slowing to 8.3% in April—still intolerably high, but in alignment with the narrative that inflation was slowly backing off. Last Friday’s reading of 8.6%, however, has caused the market to re-evaluate expectations.
The Fed’s commitment to lowering inflation
Statistically, May’s headline number wasn’t significantly any different than March’s—after all, it was only 0.1% higher than the 8.5% reading most had considered to be the peak of inflation. But the report demonstrated that inflation remains stubbornly high—and it’s this persistence of elevated pricing pressures, month in and month out, that now has the market spooked.
Where do all these observations lead us? Frankly, right to where we’ve been all along. We have known for quite a while that: