S&P 500 bear market deepens further ahead of the Fed meeting
Stocks see-sawed between gains and losses after Monday's painful selloff which put the S&P 500 into a bear market.
The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all opened higher on Tuesday, but the Nasdaq was the only index to close higher, up 19 points or 0.18%. The S&P 500 closed down about 14 points, or 0.4% while the Dow closed down 151 points, or 0.5%.
Since Friday's inflation report revealed that inflation hasn't hit an inflection point yet, investors weighed in on how aggressively the Federal Reserve will act to lower inflation ahead of its key rate decision due Wednesday.
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What will happen at the Fed meeting?
Before Friday investors, by and large, believed the Fed would raise interest rates by 50-basis-points, as Chairman Jerome Powell said last month that "a 75-basis-point increase is not something the Committee is actively considering."
But he said that new economic data which demonstrates that inflation hasn't peaked could prompt the central bank to consider a heftier rate hike. That's prompted a handful of economists, including those from JP Morgan, Barclays, and Jefferies, to predict a 75-point hike.
"Markets believe the Fed is going to need a bigger boat — in other words, a bigger number of rate hikes to try to slow demand and control inflation," Kristina Hooper, chief global market strategist at Invesco, said in a blog post referring to a quote from the movie "Jaws." That realization initially took hold on Friday, she said.
But while bigger rate hikes could help slow inflation it also "increases the risk that the Fed could choke the US economic cycle and cause a recession," Hooper said. That's because rising interest rates makes it more expensive for US consumers to borrow money and repay debt. That also ties down more money consumers could be investing.
Crypto is crashing as bond yields soar
Cryptocurrency prices continued to swing. They've been among the hardest-hit in this year's sell-off for markets as the Federal Reserve and other central banks raise interest rates to rein in inflation and forcefully turn off the “easy mode” that helped prop up markets for years.
Bitcoin was down 4.3% in afternoon trading and sitting at $22,207, according to CoinDesk. It fell overnight to nearly 70% below its record of $68,990.90 set late last year.
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Offering some support to the market was a report that showed inflation at the wholesale level was a touch lower in May than expected, though it remains very high. It could be an indication that wholesale inflation peaked in March, according to Jack Ablin, chief investment officer at Cresset Capital Management.
Treasury yields continued to climb, with the two-year yield touching its highest level since November 2007, before the financial crisis, according to Tradeweb. The 10-year yield reached its highest level during the day since April 2011.
They also had a relatively reliable warning signal of recession in the bond market flashing on and off. In afternoon trading, the yield on the 10-year Treasury had climbed back above the two-year yield, at 3.49% versus 3.43%. That's typically how things look in the bond market.
In the unusual circumstances where the two-year yield tops the 10-year yield, some investors see it as a sign that a recession may be hitting in about a year or two. It's called an “inverted yield curve,” and it's been flashing on and off intermittently over the last day.