Stocks on Wall Street were lower on Tuesday but far calmer than the day before, when a rush of selling pushed the S&P 500 into a bear market, as the Federal Reserve’s upcoming interest rate decision kept investors on edge.
After vacillating between gains and losses, the S&P 500 ended the day down 0.4 percent. European markets were sharply lower, reversing earlier gains, and stocks in the Asia-Pacific region also dropped.
Global markets are on shaky ground as the highest inflation in decades, supply-chain shortages and geopolitical tensions weigh on the outlook for growth around the world.
In the United States, inflation is accelerating at its fastest pace since 1981, amplifying worries about the direction of the economy as surging prices squeeze household budgets and company profits. As gas, food, rent and other expenses rise sharply, the Fed, at its meeting on Wednesday, is expected to discuss making the biggest interest rate increase since 1994. It will announce its policy decision on Wednesday afternoon, and many investors are betting that rates will rise three-quarters of a percentage point.
The turmoil in recent days is a reaction to data, released on Friday, that showed consumer prices in May rose 8.6 percent from a year earlier, said Hugh Gimber, a strategist at J.P. Morgan Asset Management in London. Before that, “the narrative was inflation has peaked, it’s coming down, and therefore the pressure is going to ease on the Fed,” he said.
The State of the Stock Market
The stock market’s decline this year has been painful. And it remains difficult to predict what is in store for the future.
“That got completely knocked on its head,” he added. “It was a really ugly inflation report, and it’s put the Fed under real pressure” to demonstrate how serious it is about bringing inflation down.
Mr. Gimber said he also expected the Fed to raise rates by three-quarters of a point on Wednesday. The policymakers’ message “is going to be that nothing is off the table until we see signs that the inflation path is improving,” he said.
But that’s making investors nervous. If the central bank moves too aggressively to rein in inflation, it could put the brakes on the U.S. economy and cause a recession.
Such concerns have driven the sell-off in markets in the United States this year. On Monday, the S&P 500 lost 3.9 percent, wiping out $1.28 trillion in market value. Since reaching a record high in January, the S&P 500 has fallen just over 22 percent, the seventh bear market in the last 50 years.
The weakness in stock markets continued in the Asia-Pacific region on Tuesday, although some markets pared their losses by the close. Japan’s Nikkei index was down 1.3 percent, while Australia’s key stock index tumbled about 3.5 percent, the biggest single-day drop in two years.
Stock indexes across Europe opened higher but then slumped. The Stoxx Europe 600 fell 1.3 percent after climbing as much as 1 percent, extending its losses to a sixth consecutive day.
Investors have been trying to make sense of what’s happening in the global economy.
On Monday, the credit rating firm Fitch cut its 2022 forecast for global gross domestic product to 2.9 percent, from a March estimate of 3.5 percent. It was just the latest in a series of global economic downgrades as Russia’s protracted war in Ukraine strains already stretched global supply chains, disrupts trade and pushes up the prices of oil, wheat, metals and other essential commodities.
As inflation surges, central banks around the world have been moving to raise rates. On Thursday, the Bank of England is expected to raise its benchmark rate for a fifth consecutive meeting. Last week, the European Central Bank said it would raise its rates next month for the first time in more than a decade.
With the global economic outlook weakening, traders are questioning how far central banks can go in raising rates to impede inflation without worsening the stress on companies and households.
“It’s really difficult for central banks to acknowledge that growth and inflation trade-off until inflation has peaked,” Mr. Gimber said. Later in the year, central banks may take a softer tone, but in the meantime, “with inflation heading in the wrong direction, they have to be focused on sending the signal that they are doing everything within their control to tackle that,” he said.
In its forecasts, Fitch cited concerns about “restrictive” monetary policy and inflation, noting that the supply disruptions from the war between Russia and Ukraine are having a “swifter impact on European inflation than expected.”
China is also complicating the picture. As the Chinese government doggedly pursues a zero-Covid strategy, the resulting lockdowns and restrictions have crimped China’s growth and added to the global supply chain woes. Chinese officials are increasingly concerned about the state of their economy, raising doubts that the country will meet its growth targets.
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