August 19, 2022

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US stocks are on their way to their worst first-half drop in more than 50 years

US stocks are on their way to their worst first-half drop in more than 50 years

US stocks are on track for their worst first halving in more than 50 years as the Federal Reserve’s attempt to rein in hyperinflation and growing concerns about global growth ignited this week.

The S&P 500 fell 1.1 percent in morning trading in New York on Thursday, leaving the main index down about 20 percent in 2022. Wall Street stocks haven’t had such a sore start to a year since 1970, when stock It was sold in response to the recession that ended the longest period of economic expansion in American history up to that point.

The strong decline in US stocks has stripped more than $9 trillion from the value of the US stock market since the end of 2021, according to Bloomberg data on the S&P 1500 Index, which tracks groups of small, medium and large companies.

“The market mood is dominated by the prospect of a recession in the US and Europe,” said Bastien Drut, a strategist at Paris-based asset manager CPR. “It is very negative,” he added, warning that the days of being able to rely on central banks to ease monetary policy to support economic growth are over.

The heavy Nasdaq Composite is also down this year, dropping 1.5 percent on Thursday to take its losses in 2022 to nearly 30 percent.

All S&P 500 sectors fell over the half year, except for energy stocks, which were up 30 percent. Consumer discretionary shares fell the most, posting a 32 percent drop. Utilities shares, seen as a way to hedge against inflation due to stronger companies’ ability to pass higher costs on to consumers, have fallen to say the least, falling 2.5 percent this year.

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“It was all very much driven by inflation,” said Paul Leech, co-head of global equities at Barclays. “It was the theme of the year and it really intensified, really.”

Worldwide, major stock indices have fallen sharply this year. The European Stoxx 600 Index is down 1.5 percent on Thursday, leaving it down about 17 percent this year. The MSCI Asia Pacific Market Index is down 18 percent in 2022 in dollars.

Line chart of the S&P 1500 with a market capitalization of $tn showing investors staying away from US stocks

Senior policymakers at the European Central Bank’s annual conference on Wednesday warned of an era of low interest rates and moderate inflation It has come to an end In the wake of the inflation shock caused by the Russian invasion of Ukraine and the epidemic.

Federal Reserve Chairman Jay Powell has warned that if the central bank does not raise interest rates enough to combat inflation quickly, the United States could face severe and recurring bouts of price increases that policymakers may struggle to rein in. Some pain, but the worst pain would be from failing to tackle this high inflation and allow it to continue.”

Markets were shaken this month by interest rate hikes from the Federal Reserve and the Bank of England, with the former raising the federal funds rate by 0.75 percentage points to a new target range of 1.5-1.75 percent with policy makers. This indicates another significant increase in the rate next month.

Bar chart of the S&P 500's first half performance (%) showing US stocks heading for their worst first half since 1970

The European Central Bank also plans to raise a quarter of a percentage point in July for the first time since 2011.

“Stubborn inflation readings have precipitated a hawkish Fed response, shifting policy focus to fighting inflation despite the potential economic consequences,” said Scott Kronert, US equity analyst at Citigroup. “Investors are well-deservedly reluctant to buy ahead of the ongoing Fed rate hike and fear of a reset in earnings expectations.”

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Citi also lowered its year-end forecast for the S&P 500 index from 4700 to 4200 on Wednesday. While this new target means an increase of about 11 percent from the current level of the benchmark, the bank’s economists have also put the odds of a global recession at 50 percent.