Market snapshot: S&P 500 enters bear market as recession fears mount

Our head of markets reports on the impact the darkening mood in the US is having on the major indices, while having spent much of the year in positive territory, the FTSE 100 is now down by 1.6% in the year to date.

Investors have endured a bruising start to the week as fears of recession begin to mount.

In an escalation of estimates of the Federal Reserve’s hawkish monetary stance, expectations for the interest rate rise due tomorrow have now been amended to a hike of 0.75% from the previous level of 0.5%, which had been widely expected.

At the same time, there was an inversion of the yield curve between the benchmark two and 10-year Treasury bonds in the US, which is seen as a harbinger of forthcoming economic contraction. The measure has tended to be a reliable warning in the past and, in the absence of any immediate positive catalysts, there is little to present an opposing view.

Indeed, the prospect of higher interest rates has done little to improve the attractiveness of stocks on a valuation basis, since the likely pressure on profit margins in particular are set to feed through to the next set of quarterly numbers due around the end of this month. While a tight labour market and rising wages are friendly for the economy, this is not necessarily the case for companies that bear the brunt of additional cost pressures.

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The darkening mood was damaging for the major indices, where the flagship S&P 500 moved into bear market territory, now having dropped by 21% in the year to date. Meanwhile, the Dow Jones has lost 16% and the technology-heavy Nasdaq index, previously the destination of choice for investors seeking high growth prospects, has declined by 31% so far this year.

Unsurprisingly, the sour mood passed over into Asian markets, where the prospects of a delayed reboot to the Chinese economy in light of further lockdowns added to the global growth concerns. More positively, the possibility of some monetary easing from the Chinese authorities and that much of the bad news is being priced in, has left the optimists with some small room for manoeuvre.

In the UK, a positive open for stocks did little to erase the damage caused by the previous day’s decline. Having spent much of the year in positive territory as compared to many of its global peers, the FTSE 100 is now down by 1.6% in the year to date.

Today’s respite could yet prove to be brief, especially if there are any further shocks to come on the scale of central bank tightening. In addition, the strength of the US dollar as a haven investment has weakened sterling, which in turn has slightly underpinned the FTSE 100, whose constituents are largely dollar-facing in terms of earnings and exposure. Even so, the level of volatility currently being seen across most asset classes is likely to persist for the time being.