The relentless sell-off in stocks started to mark some grim milestones over the past week. The S&P 500 briefly fell into bear market territory on Friday, falling more than 20% from its intraday record in January. There is no official definition of a bear market, so investors will debate whether we are now officially in a bear market. Many on Wall Street define it as what we saw on Friday — a 20% drop from a 52-week intraday high. But others want to see it happen on a closing basis before calling it a bear market. Most people think we are in a bear market that started in January. The tech-heavy Nasdaq Composite fell deeper into its own bear market — now down nearly 30% from its all-time record. The Dow Jones Industrial Average fell 2.9% for the week, its eighth straight weekly loss. It was the first eight-week losing streak for the Dow since 1923. The S&P 500 and Nasdaq Composite fell for the seventh straight week, down 3.1% and 3.8%, respectively. There was a massive sell-off as investors shunned risk assets amid concerns over how companies and U.S. consumers would fare against a recent spike in inflation. At the same time, the Federal Reserve said it would keep raising interest rates to quell those pressures – raising concerns that tightening monetary policy could tip the economy into recession. Here’s why the market tumbled this week, and what Wall Street pros think could happen next. Why it’s happening: Walmart and Target’s earnings, Powell’s comments This week’s decline comes after Target’s and Walmart’s consecutive quarterly reports, suggesting both companies are grappling with rising costs. “As this week’s earnings reports from Target and Walmart remind us, rising sales are no guarantee of higher earnings. Inflation may help retailers’ bottom lines, but it also means higher-than-expected spending and Lower-than-expected margins,” wrote Ed Yardeni, chief investment strategist at Yardeni Research. “In addition to rising costs, supply chain issues have also left America’s largest retailers in limbo, and federal subsidies have left consumers free to spend compared to last year,” he added. The reports sparked a sharp market sell-off on Wednesday as the Investors worry that rising inflation will also eat into the profits of other companies. The Dow and S&P 500 lost 3.6% and 4%, respectively, on the day, their biggest one-day losses since June 2020. Meanwhile, the Nasdaq fell 4.7% on Wednesday, its biggest one-day drop since May 5. The figures also raise health concerns among consumers. Walmart said consumers were buying fewer items, with many skipping purchases of new clothes and other items. At the same time, Target said consumers were buying fewer big-ticket items like TVs. Target shares fell 29.3% for the week, their biggest weekly loss since October 1987. Walmart shares fell 19.5 percent, their biggest weekly drop since October 1974. Beyond that, the Fed doesn’t appear to be coming to help the market anytime soon. Federal Reserve Chairman Jerome Powell said on Tuesday that the central bank will keep raising interest rates until prices start to pull back from current levels. “If this involves neutral levels beyond widely understood, we will not hesitate to do so,” he said. “We’ll get there. There won’t be any hesitation about it.” But some on Wall Street worry that a hawkish stance could tip the economy into recession. Guggenheim’s Scott Minerd called the Fed’s tightening plans “overkill,” noting: “Given the Fed’s aggressive stance, we’re going to have a big sell-off in stocks this year until we find a bottom because The Fed has made it clear not to be ‘bearish’ on the stock market.” He said Wednesday: “Unless we get something that threatens financial stability, they seem happy to see stocks fall as long as they see it as an orderly fall.” What happens: It depends on the economy Several Wall Street strategists have already cut their year-end targets for the S&P 500, but many of them think what happens next depends on whether the U.S. economy slips into recession. Deutsche Bank’s Binky Chadha said in a report this week that if a recession occurs in the near future, the S&P 500 could fall all the way to 3,000. That’s 23% lower than here. “Inflation has proven to be sticky, and the Fed’s forward guidance is for rate hike cycles that have historically ended in recessions (8 out of 11, or 73 percent of the time), and the Fed acknowledges and accepts that risk,” Chadha said. And noted that his base case was not a looming recession. The strategist lowered his base target target for the S&P 500 in 2022 to 4,750 from 5,250. Meanwhile, Bank of America said a drop in the S&P 500 to 3,200 was a “realistic worst-case scenario,” and strategist Savita Subramanian noted that the current market landscape looks a lot like the one it did when the dot-com bubble burst in 2000. Investor Jeremy Grantham, known for calling the market bubble, told CNBC this week that today’s bubble is worse than it was in 2000. “We were down about 19.9% on the S&P 500 and Nasdaq the other day, and about 27% on the Nasdaq. I would say at least, we’re probably going to double that,” GMO The co-founder told CNBC’s Kelly Evans on “The Exchange” on Wednesday. “If we are unlucky, it is very likely that we will have three legs like in the 2000s, which may take a few years.” The US economy shrank by 1.4% in the first quarter, the first negative growth since the epidemic. Still others are more optimistic if a recession can be avoided. JPMorgan’s Marko Kolanovic, who has effectively navigated markets during the pandemic, said stocks are pricing in “too much recession risk.” “If a recession hadn’t happened, so many downgrades would have been very severe, and given the reduction in positioning and pessimism, stocks would recover from here,” Kolanovich wrote this week.
Breaking the market into a bear market — and what’s next