Stocks fell on Friday, ending one of the worst weeks of the year for Wall Street but prompting warnings that an intractable slump for the global economy is only just beginning.
In the wake of ugly inflation numbers and reeling from the whiplash of another stock market reversal, a parade of prominent investors and corporate executives made it clear that they believed the worst was yet to come for the economy and financial markets.
After hitting a low in June, the S&P 500 had rallied more than 17 percent into mid-August, before losing steam again. This week’s sell-off leaves the index just 5.6 percent above the June low. Friday’s 0.7 percent fall took the index’s weekly loss close to a 5 percent threshold it has breached only three times this year.
Now, some of the most powerful trading houses in the world, deploying trillions of dollars on behalf of pension funds, governments and other investors, are warning that there is more pain ahead.
“If you asked me a year ago, ‘What is the worst scenario for financial markets?’ I think things are now worse than anything we could have imagined,” said Nicolai Tangen, the head of Norway’s sovereign wealth fund, the largest of its kind. The fund manages money generated by Norway’s extensive oil and gas sales and has $1.4 trillion invested around the world.
Friday’s drop came after General Electric’s chief financial officer, Carolina Dybeck Happe, bemoaned lingering supply chain pressures at a conference on Thursday, and the logistics giant FedEx warned of a global slump that would hurt its profits. Together, they added to a series of corporate alarms that have rattled confidence in the outlook for the economy. G.E.’s stock price fell 3.7 percent on Friday, while FedEx cratered more than 21 percent. FedEx’s chief executive, Raj Subramaniam, speaking to CNBC on Thursday, predicted a “worldwide recession.”
The fall on Friday followed the S&P 500’s worst single-day decline since June 2020, a 4.3 percent slide on Tuesday, that came after the widely watched Consumer Price Index shattered hopes that inflation had begun to ease. The report reignited concerns that the Federal Reserve could push the United States into a recession as it looks to combat rising prices.
The economic concern was also evident in other corners of the financial markets. Corporate debt prices fell and oil prices notched a third straight week of losses.
Mr. Tangen said that he didn’t think there was an investment area anywhere in the world likely to make money in the near future. “That’s the really depressing thing,” he said.
The central issue worrying investors is how far the Fed will need to go as it looks to break the cycle of inflation hitting the American economy. Prices began to rise last year as a result of the reopening of businesses and pent-up consumer demand, and went up further as energy prices spiked after Russia’s invasion of Ukraine. Tuesday’s inflation report showed it has now taken on a pervasive nature, amplified by companies facing pressure from workers to increase wages as they grapple with the rising cost of living.
“What we are faced with is inflation expectations that are pretty embedded,” said Seth Bernstein, the president and chief executive of AllianceBernstein, a fund manager with more than $600 billion in assets. A recession is the only way to “break” them, he said.
The Fed’s primary tool to control inflation is its benchmark interest rate, which it has already raised from near zero in March to a range of 2.25 percent to 2.5 percent. It is expected to raise rates again next week.
Investors have raised their forecasts for how much the Fed will need to increase interest rates and how long the central bank will keep them high, foretelling more pain for companies, lower stock prices and higher unemployment.
Prices in futures markets that indicate forecasts for interest rates show an expected increase of three-quarters of a percentage point to be administered by the Fed when the central bank’s officials meet next week. Anything higher would mark a hefty move not made since 1984 and could lead financial markets to drop further.
Overall, futures point to a peak in rates of 4.25 percent to 4.5 percent next year, a full 2 percentage points higher than the Fed’s current policy level.
And the Fed is not alone in its campaign to elevate interest rates to combat inflation. On Thursday, the World Bank added to recession warnings, saying that the combined effect of central banks all over the world raising interest rates simultaneously could push the global economy into a downturn as soon as next year.
Among the largest U.S. banks, predictions diverge. Economists at Wells Fargo and Citi expect recession. David Solomon, chief executive of Goldman Sachs, said on Friday that his long-term view had not been altered by the fresh inflation data this week, or the market ructions that followed. But he noted that financial markets “are in a period of lower, longer and bumpier.”
JPMorgan and Morgan Stanley continue to predict a so-called soft-landing, whereby the Fed is able to restrict the economy with higher interest rates enough to bring down inflation without going too far and causing a recession.
Dan Ivascyn, chief investment officer of the bond investment house Pimco, which manages roughly $1.8 trillion, said he was “a bit more concerned” about just how broad inflation pressures across the U.S. economy are following Tuesday’s data release.
“Investors can expect a lot more volatility in markets going into year end,” he said. “We think 2023 is still going to be filled with lots of uncertainty.”
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September 17, 2022 at 04:25AM
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