Why did the stock market fall and what will happen next, according to experts

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when the alarm is over Inflation and potential recession In recent months it seemed, a stock market rally offered a source of optimism – until this week.

SThe &P 500 fell 2.1% on Monday, its worst day in more than two months. By Wednesday afternoon trading, the index had recovered some of its losses but remained down for the week.

The recent drop marks the latest swing in this year’s market volatility. Reversing from the historic fall in the first half of 2022, SThe &P 500 rose more than 15% during the two-month period beginning in mid-June. Over the same period, the tech-heavy Nasdaq rose more than 17% and the Dow Jones Industrial Average rose nearly 14%.

In fact, this rally is a major reason for the bearish trend in recent days, as investors determined that the stock is overbought, market analysts said. The decline is also due to fears that the Federal Reserve will continue A series of aggressive rate hikesWhich aims to reduce inflation by slowing the economy, but risks driving the US into a recession, he said.

But analysts differed on whether this week’s slowdown was a brief hiccup or a sign of more damage to come, suggesting that fuzzy economic data supports different interpretations about the outlook for the economy and in turn corporate Profits are a major focus for stock forecasters.

“The market doesn’t go up or down forever,” Ed Yardeny, president of market advisory firm Yardeni Research and former chief investment strategist for Deutsche Bank’s U.S. equity division, told ABC News. “At some point, buyers get tired and new buyers think things are too expensive and are waiting for a pullback.”

“It’s a tug of war between bulls and bears,” he said. “For a while, the bears were gaining ground. In the last few months, the bulls gained ground and now we may be in a stalemate for a while.”

Analysts said volatility in markets was largely due to growing concern that sky-high inflation would require the Fed to push for ongoing, large hikes in interest rates, which would slow the economy and risk a recession. , analysts said.

In general, the market has climbed in response to news about slowing inflation and a possible rate softening; Inflation spikes and rate moves are a common cause of sell-offs.

For example, lower-than-expected inflation figures S released earlier this monthThe & P 500 rose to its highest level in three months, reflecting optimism that price growth is peaking.

Federal Reserve Board Chairman Jerome Powell speaks during a news conference after the two-day meeting of the Federal Open Market Committee (FOMC) on July 27, 2022 in Washington, DC.

Elizabeth Frantz/Reuters, FILE

In each meeting over the past two months, the central bank has raised its benchmark interest rate by 0.75% – the dramatic increase it had in 1994.

The increase in rates may have contributed to the slowdown in the rise in prices. Although still high, price increases last month have fallen short of the historic pace reached in June, according to Data from the Bureau of Labor Statistics, The bureau said the Consumer Price Index, or CPI, rose 8.5% in July over the previous year, a marked slowdown from the 9.1% year-on-year rate measured in June.

Still, Fed officials have indicated in recent days that the central bank intends to continue a series of rate hikes, aimed at bringing inflation back to the 2% target. Last Thursday, San Francisco Federal Reserve Chair Mary Daly told CNN That a 50- or 75-point basis increase would be “appropriate” at a central bank meeting next month and that rate hikes will continue into at least 2023.

Such signals from the Fed have contributed to the market’s decline this week, Evan Fenseth, a market analyst at Tigress Financial, told ABC News.

“There is a fear that the Fed will have to raise rates aggressively to contain inflation, but there is also a fear of overdoing it and the Fed in itself and the economy decimating it,” he said.

Guggenheim analyst John Diffucci told ABC News that market forecasters also face the challenge of economic data.

Inflation remains near 40-year highs and GDP has slowed, leading to rising inflation, a harmful combination of high prices and anemic growth. But observers can take solace in employment figures, which remain at strong levels, such as The economy added a blockbuster 528,000 jobs Last month and the unemployment rate is 3.5%.

“Things look very strong in some indicators of the macro economy, while things look very weak in other indicators,” he said. “It’s the schizophrenic behavior of the market.”

Analysts offered conflicting assessments of the market outlook, as partial market data sets an uncertain future for the economy.

Tigress Financial’s Feinseeth said if inflation continues to slide, the Fed could reduce its aggressive rate hikes, which could send stocks through the end of the year.

“We may see a new all-time high in the stock market by the end of the year,” he said.

Guggenheim’s Diffucci said a possible slowdown, however, would affect corporate profits, leading to a prolonged downturn in the market.

“If we go through a longer period of weakness, there is a possibility of a softening or downtrend in stocks that usually trade at higher multiples,” he said. “Its as simple as that.”

Yardeny, who identifies the market as “right in the middle” on the spectrum between bears and bulls, predicted the stock would move “sideways.”

“Everyone is asking these days whether the market will go up or down,” he said. “The third option is nowhere near faster.”

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