The selloff in stocks deepened after weak consumer-spending data fueled worries about a recession, with the S&P 500 suffering its cruelest first-half since Richard Nixon’s presidency.
It was a rout for the history books, with the benchmark gauge down 21% in the first six months of the year—the most for such a span since 1970. Wall Street kept accumulating superlatives, with the 10-year U.S. yield falling to 3% after a high of 3.5% in June (a decade ago). Dollar had its strongest quarter since 2016. Bitcoin’s nearly 60% decline since March ended was its largest drawdown since the 3rd quarter 2011.
The first year of a decline in U.S. consumer spending suggests an economy that is on a weaker foundation than expected, given the Federal Reserve’s hikes and rapid inflation. Markets have been agitated by the view that central bankers must act quickly because they misjudged inflation. Traders are increasing their bets that the economy will collapse under tightening.
“The stagflation that has gripped our country right now is going to make it tough on the stock market over the intermediate term,” said Matt Maley, chief market strategist at Miller Tabak. “When demand is not the key reason why inflation is a problem, a slower economy is not going to help bring inflation down as much as some experts seem to think.”
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Key segments of the world’s biggest bond market—such as the difference between five and 10-year yields—have inverted, signaling bets that higher rates will hurt the economy. Bloomberg’s data shows that inversions generally occur six- to 18 months before recessions.
Greg Marcus (Managing Director at UBS Private Wealth Management) says that after an uneven first half of 2018, July will prove pivotal in determining the future direction for markets. He cites key inflation data, earnings from corporations, and Fed meeting as factors. He says volatility will probably remain elevated until there’s evidence that inflation is moderating, recession risks are receding and geopolitical threats are declining.
A strategy that worked for 10 years has seen new lows over the last few months. Traders have shunned the “buy-the-dip” mantra while embracing the “sell-the-rally” mode. As a result, the S&P 500 entered a bear market for the second time since 2020, having plunged over 20% from its January peak.
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But dismal performance is not an indication of what’s to come. In 1970’s first half, the U.S. equity benchmark fell 21%. This was during an era of high inflation. The current climate has been compared to that period. It rose 27% over the past six months.
“We’re going to have a double-digit return between now and the end of the year,” Jonathan Golub, head of U.S. equity strategy at Credit Suisse, told Bloomberg Television. “We don’t have a profit problem as much as people say.”
Goldman Sachs Group Inc. strategists made the observation earlier this week that U.S. profits margin estimates were way too optimistic. Stocks are at risk of further declines if Wall Street analysts reduce their expectations. Morgan Stanley’s Lisa Shalett said Monday analysts need a reality check about their earnings projections for this quarter.
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Oil fell for the first time since November, as OPEC+ finished the production restart that was halted by the pandemic. The third consecutive month of decline in gold prices.
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