Wall Street braces for turmoil

The stock market is set to close out a brutal month of losses as Wall Street braces for a rocky second half of the year.  

All three major U.S. stock indexes — the Dow Jones Industrial Average, the S&P 500 and the Nasdaq composite — reached bear market status in June, falling at least 20 percent from record highs set toward the start of the year. While stocks sank gradually for much of 2022, the sell-off accelerated in June amid deepening concerns about the economy.  

“We were just kind of finding our way along the bottom, and then in June that semblance of a bottom fell out. I think that was a real psychological turn for investors,” said Callie Cox, an investment analyst at eToro, an online investing platform.  

“Inflation isn’t under control and markets haven’t quite found their footing yet. June felt like a reality check in a way, and it was a reality check for a situation we didn’t fully understand,” she continued.  

The Dow fell roughly 1.5 percent on the month so far, the S&P is down 2 percent and the Nasdaq is down 3 percent.  

After cruising through record highs through 2021, stocks drifted lower throughout the spring as the Federal Reserve ramped up its efforts to fight inflation. Economists were hopeful that inflation had peaked in March, in sync with the Fed’s first interest rate hike, and would finally come down after reaching 40-year highs.  

But as inflation steamed ahead through May and June, the Fed accelerated its attempts to cool off price increases while also boosting the risk of a recession.   

Higher interest rates from the Fed are meant to slow the economy enough to reduce inflation without halting growth or forcing layoffs. The Fed aims to ramp up rates gradually and give the economy enough time to adjust to higher borrowing costs.  

The Fed, however, has been forced to rush the process as the war in Ukraine and pandemic-related supply snarls push inflation even higher. The skyrocketing price of oil and gasoline has also fueled rapid price increases throughout the economy.  

To get ahead of rapidly rising inflation, the Fed raised interest rates by 0.5 percentage points in May and in June issued the first 0.75 percentage point hike since 1994  

“The June sell-off was largely driven by more aggressive rhetoric from the Fed, rising oil prices and inflation that is remaining sticky,” said Lindsey Bell, chief markets and money strategist at Ally.  

Higher Fed interest rates are a direct financial blow to companies, which face higher borrowing costs and slower sales as rates go higher and consumers pull back spending. Higher interest rates also make investments in riskier assets and companies without proven track records less attractive, which brings down the value of stock prices.  

While stocks are crumbling under the weight of higher borrowing costs, investors have also become alarmed with their potential impact on the economy. The sell-off comes amid a steep decline in consumer confidence and rising fears of a recession hitting the U.S. economy as soon as next year.  

The Conference Board’s consumer confidence index, a gauge of how Americans view the economy, fell to 98.7 in June, according to data released by the business trade group Tuesday. The index fell from 103.2 in May to the lowest point since February 2021, before COVID-19 vaccines were widely available in the U.S.  

Cox said the steep decline in stocks over the past six months is a natural part of the market flows and not necessarily a harbinger of recession. All three indexes remain above their pre-pandemic highs after exploding in value through 2020 and 2021 thanks to combination of near-zero Fed interest rates, trillions in fiscal stimulus and a decline in spending on services during the height of COVID-19 fears.  

“Suddenly, we’ve swung to the other side of the pendulum and we’re dealing with a Fed that’s raising interest rates and talking interest rates into the market aggressively,” she said.  

“These ebbs and flows are what you see in markets over time. It just turns out that the ebbs and flows are a little bit bigger these days.”