Talking point

How bad could the bear market get?

There’s a whiff of panic in the air – and not just in stock markets

“It’s getting ugly out there,” said Ben Wright on Telegraph.co.uk. “Wall Street collapsed into a bear market on Monday” – and fell further the following day, “amid fears that sharply rising interest rates will tip the world’s biggest economy into a recession”. Stock markets duly swooned across the world. The rout was triggered by figures showing that US consumer prices had jumped 8.6% from a year ago in May, said Hudson Lockett in the FT. This stoked expectations that the US Federal Reserve could implement “an extra-large rate rise of 0.75 percentage points” at this week’s monetary policy committee – and may follow up with another in July. Growing anticipation of sharper rate rises also caused prices of government bonds to lurch downwards. 

Fed chairman Jerome Powell “prizes predictability”, said The Economist. The idea is to give investors “ample guidance” to prepare them for policy changes. “But the past few days have been a whirlwind.” Suddenly, “the table has been slanted in a more hawkish direction”, with Powell contemplating “the biggest single rise” since 1994. “History suggests that rapid monetary tightening often precedes a recession. But the Fed knows that runaway inflation would be worse.” There’s no longer any excuse for failing to act, agreed DealBook in The New York Times. “Supply chain problems have eased”, yet prices have nonetheless continued to rise because of “continued intense demand for goods and services”. So far, “the Fed’s moves have not had much effect”. Indeed, some economists argue that the current 8.6% inflation figure may even underestimate the true situation. 

The likelihood is “of a long, grinding market correction amid extempore monetary policymaking”, said Lex in the FT. No wonder “investors are rushing for safety”. People “quibble about definitions of a bear market”, said John Stepek on MoneyWeek.com, but with America’s benchmark S&P 500 index now down by 20% this year (and the tech-focused Nasdaq down by nearly a third), “no one’s querying that we’re in one now”. Still, “the scarier stuff is happening in bond markets”. The yield on ten-year US Treasury bonds (which moves inversely to the price) hit its highest level since 2018 – raising “some intriguing questions about the cost of borrowing for governments”. It’s worrying that “yield spreads in the eurozone are widening”: markets seem to be again “differentiating between the creditworthiness of countries” in the zone. That, of course, was the root of Europe’s sovereign debt crisis in the 2010s. No one is yet predicting a repeat. But it was telling that the European Central Bank convened an emergency meeting this week.

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