Stocks briefly entered a bear market on Friday after a chaotic day of trading amid fears of a recession in the U.S. economy.
After trading opened in New York at 9 a.m. EDT, the Standard and Poor’s 500 – which aggregates the values of 500 large companies across the United States – began to rise for 45 minutes, to a daily high of 3,941.06. However, values then began to trend downward, falling to a low of 3,811.28 by 1:30 p.m. This reflected a 20.9 percent drop in the index’s value from January 5, when it reached an all-time high of just below 5,000. A flurry of trading activity thereafter sent the index’s price upward, where it closed 0.01 percent higher than the previous day as trading closed for the weekend.
The financial sector normally defines a bear market as a market drop of 20 percent or more over two months or more. Friday’s decline was the biggest drop in value from a yearly high since the onset of the Covid-19 pandemic in 2020, when the S&P 500 fell by over 1,000 points. Already, the S&P 500 has fallen by 600 points since March.
The S&P 500, together with the Dow Jones Industrial Average and Nasdaq Composite Index, is widely seen as a measure of the performance of the U.S. economy — using a weighted average system, with its total market capitalization being $36.7 trillion. Both other indices also experienced major declines on Friday. The Dow fell 600 points and, though it rebounded to close 8.77 points higher than the previous day, marked an eight-week losing streak, the first one in 99 years. The Nasdaq Composite Index, meanwhile, mirrored the S&P 500 and fell by 500 points by 1:30 p.m., though its increase was smaller, and it closed below the previous day.
The volatile trading comes as fears mount of a major recession in the economy, two years after the Federal Reserve’s quantitative easing program increased liquidity in the U.S. market and sent stock markets rallying. The central bank, however, announced on May 4 that it would raise the Federal funds interest rate by half a point and reduce quantitative easing to reduce inflation, which is at a 40-year high. The rate hike was double the usual rate increase, of 0.25 percent, and the largest increase in 22 years, and caused stock prices to fall significantly that day.
In a recent speech, Federal Reserve chairman Jerome Powell said “we won’t hesitate” to raise rates until Consumer Price Index inflation is reduced to the bank’s target of 2 percent. Other factors seen as contributing to a recession are supply-chain shortages, worker shortages, and Russia’s ongoing war in Ukraine. In that vein, major investment bank Goldman Sachs cut its U.S. growth targets by 10 percent on Monday.
Along with the recession, experts claim that the stock market is undergoing a cyclical correction delayed by the pandemic’s onset, which prolonged a rally that saw the S&P increase its value by 90 percent in three years. George Ball, chairman at investment firm Sanders Morris Harris, wrote that “stocks are still liberally priced and the psychology that drove them upward for a decade has turned negative.” Meanwhile, Armaan Kalsi, founder of start-up incubator Shuttle Labs, told National Review that the market may undergo the “biggest downward correction since the Great Recession in 2008,” and that businesses should be prepared for a rough period ahead, with capital sparing.