Stocks eye steepest slide in years as central bankers roil markets

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A tumultuous week on Wall Street, which began with stocks plunging into a bear market for the second time during the pandemic, ended with a small gain Friday. That was small comfort after a brutal period for investors, who have seen the value of their portfolios and retirement funds lurch downward.

Canada’s main stock index fell on Friday to close out its worst week in more than two years, as the energy sector continued its recent losing streak and offset gains by technology and consumer discretionary stocks.

The Toronto Stock Exchange’s S&P/TSX Composite Index ended down 73.58 points, or 0.4 per cent, at 18,930.48, its lowest closing level since March, 2021.

For the week, the TSX was down 6.6 per cent, its biggest weekly decline since March, 2020.

The S&P 500 rose 0.2 per cent Friday but ended the week with a loss of 5.8 per cent, its 10th decline in the past 11 weeks and its worst weekly performance since March, 2020 – when stocks crashed as the coronavirus spread around the world.

This time around, the selling has been fuelled by persistently high inflation, which erodes people’s spending power and puts a dent in corporate profits, and by fears that the Federal Reserve would raise interest rates to beat it back. By making it more costly to borrow to buy a house, invest in a business or do just about anything else with debt, the Fed can cool demand and bring prices down, but if it goes too far it can choke growth and tip the economy into a recession.

From its peak in early January, the S&P 500 has fallen 23.4 per cent, crossing the 20-per-cent threshold that Wall Street uses to define a bear market, a sign of deep unease among investors.

The worst day of the week, a drop of nearly 4 per cent, came Monday, as investors anticipated an unusually large interest rate increase by the Federal Reserve. That drop put stocks officially in a bear market. On Wednesday, the Fed delivered on those expectations, raising its policy rate by 0.75 percentage points and indicating that it was prepared to continue with large increases until inflation is under control.

Analysts say the turmoil isn’t likely to end until investors see signs that inflation has begun to peak – or until the Fed begins to signal an end to its campaign to combat rising prices, probably a distant outcome.

“My colleagues and I are acutely focused on returning inflation to our 2-per-cent objective,” Fed Chair Jerome Powell said Friday in remarks prepared for a conference hosted by the central bank.

Consumer prices rose at a rate of 8.6 per cent in May.

Of the 11 company sectors in the S&P 500, 10 are in the red. Only one sector is up for the year: energy. Prices and demand for oil, gas and more have skyrocketed, first as people returned to many pre-COVID-19 activities and then as Russian energy became untouchable amid its war in Ukraine. Prices are not likely to go down soon.

Stocks are perhaps the most popular measure of the financial mood, but other markets were plenty shaken, too.

Cryptocurrencies, which some believe should act as havens in times of inflation and turmoil, have had a torrid time. Bitcoin lost about 30 per cent of its value this week alone, falling to its lowest level since 2020. Some of the crypto industry’s biggest players, such as Coinbase, Gemini and Crypto.com, announced layoffs. Celsius, an experimental crypto bank, abruptly halted withdrawals.

Investors have veered from relief that policy makers are taking aggressive actions to rein in inflation to fear about the effect those actions may have on economic growth. The VIX volatility index, which is commonly called the “fear index” because it tracks investors’ demand for a type of financial instrument that offers protection against market drops, has more than doubled in the past year, to well over 30.

There are areas of the economy still doing better than in past bear markets, such as unemployment and housing. But it’s possible that Americans will lose a lot more money before things get better.

“There’s a lot more pain left,” said Aswath Damodaran, a professor of finance at New York University.

-With a report from Reuters

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