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CNN Business: The Stock Market Sell-off Could Be Just Getting Started

June 21, 2022
Market Crash

Article by David Goldman in CNN Business

If you're nervous about the stock market, you've got good reason to be: Central banks around the globe are losing the battle against inflation, and their response could plunge the global economy into a recession.

Step back: Last week, the Federal Reserve hiked interest rates by three-quarters of a percentage point — its biggest rate rise since 1994. The Bank of England increased its target rate, too, for the fifth time since December. And the Swiss central bank raised rates for the first time in 15 years.

They're hardly done. The BOE conceded that inflation would spike near 11% in the fall, and the Fed just increased its inflation expectations for 2022 by a full percentage point. Although Fed Chair Jerome Powell said last week there's still a chance the US economy could avoid recession, he conceded that Russia's invasion of Ukraine, the ongoing pandemic and the supply chain and energy crunches "have raised the degree of difficulty and created great challenges ... so we just don't know."

By pulling back stimulus and putting the monetary policy engine into full reverse, the Fed and other central banks have rattled investors. The US stock market has entered a bear market, and last week was Wall Street's worst since March 2020: The S&P 500 tumbled nearly 6%, and the Dow plummeted 1,504 points, or about 5%.

US stocks have fallen 23% since hitting a record high January 3. Yet they could have plenty more room to fall — particularly if the efforts to gain control of runaway prices send the economy into a downturn.

"The Fed may be willing to push the economy into a recession to actually get inflation under control," Anthony Saglimbene, global market strategist at Ameriprise, told me.

"I think that was probably in the back of investors' minds, but it's front and center now. Stocks are going to have a hard time until they figure out where that end point is for the Fed," he added.

Recessions have not been kind to investors. Bear markets during recessions have historically been longer and deeper than bear markets that weren't associated with economic downturns, notes Sam Stovall, chief investment strategist at CFRA Research. Since World War II, stocks have fallen 28% in bear markets without recessions — and 36% in those during recessions.

Downturns keep people from spending, hurting companies' bottom lines. Although some Wall Street analysts have priced a recession into their earnings forecasts, stocks may still be a bit expensive if history is any guide. Based on historical price-to-earnings ratios during a recession, Stovall predicts the S&P 500 could bottom out at around 3,215, a decline from peak-to-trough of about 33%.

Even analysts who aren't predicting quite that dramatic a decline believe stocks have room left to fall. Keith Lerner, chief market strategist for Truist Advisory Services, believes the S&P 500 will ........

To read this article in CNN Business in its entirety, click here.

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