Yesterday, the S&P 500 dropped more than 3 percent, continuing a long decline for stocks despite investors’ hopes for a rally. This places the index down 24 percent from its previous highs in January, further pushing stocks into bear market territory. Stock markets turn from bulls to bears once they drop more than 20 percent from recent peaks, potentially indicating that the economy is headed towards a recession. In fact, if losses continue at this rate, the S&P could experience its worst quarter since the onset of the 2008 financial crisis.

Stock markets are currently fighting the effects of the fastest growing inflation in four decades, which the Federal Reserve is attempting to combat by raising interest rates. The idea is to decrease inflation by similarly tamping down demand, but too much of a slowdown could tip the nation into a recession. “Inflation is not going to come down anytime soon, and it is going to take some kind of slowing of the economy for that to happen,” said economist Jay Bryson. “It’s a really tricky situation.” Other central banks have joined the Fed in raising interest rates, with the Bank of England and Bank of Switzerland both implementing aggressive increases in recent months.

By making borrowing more costly both for consumers and businesses, policymakers hope to buy time to allow supply chains and labor markets to return to normal after pandemic disruptions. But with consumers already struggling to make ends meet, such a slowdown could lead to a recession that reverberates throughout the economy. “Already, households have been squeezed by incredibly high inflation,” said economist Beth Ann Bovino. “You just have to go to take your car to the gas station and feel the pain. That means that those high prices, both particularly with food and fuel, mean that a lot of people’s paychecks are going into essentials, very little is left to spend elsewhere. People are feeling the pain and are frustrated by it.”

Questions:

1. What is a bear market, and how does it potentially indicate an oncoming recession?
2. Do you think the Federal Reserve should raise interest rates to slow down the economy and combat inflation? Why or why not?

Source: Ben Casselman and Isabella Simonetti, “Wall Street Shudders as Focus Returns to Recession Risks,” The New York Times, June 16, 2022.