S&P 500 Enters Bear Market as Dow, Nasdaq Fall

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The stock-market selloff deepened Monday, with the S&P 500 entering a bear market, as investors took another look at Friday’s red-hot inflation data and liked it even less.

Faced with rising chances of aggressive monetary tightening by the Federal Reserve, investors broadly unloaded risk. The S&P 500 slumped 3.9% as 495 of its 500 components ended the day lower. The declines left the U.S. stock benchmark down more than 20% from its January record, sending it into a bear market for the first time since 2020.

Meanwhile, a rout in cryptocurrencies highlighted investors’ increasing unwillingness to hang on to their most speculative holdings. The price of bitcoin plunged below $23,000 before paring that loss to trade at 5 p.m. ET down 66% from its November high.

The drop in cryptocurrencies accelerated Monday after interest-rate fears sparked a weekend selloff. Bitcoin, the biggest cryptocurrency, traded at 5 p.m. at $23,250.72, a drop of 15% from 24 hours earlier. Ethereum was down 16% from 24 hours earlier to about $1,243. Shares of Coinbase Global fell 11%, while Celsius Network said it was pausing all withdrawals, swaps between cryptocurrencies and transfers between accounts, citing “extreme market conditions.”

Even rare bets that have worked in 2022 stumbled Monday. The energy segment, the only one of the S&P 500’s 11 sectors in positive territory this year, fell 5.1%, a steeper decline than that of the broad index. The utilities group, the second-best performer in 2022, also lagged behind the market with a daily drop of 4.6%.

“We’re definitely seeing a risk-off atmosphere, a flight to quality,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “In that environment, people need to raise cash.”

The S&P 500 fell 151.23 points, or 3.9%, to 3749.63. The Dow Jones Industrial Average dropped 876.05 points, or 2.8%, to 30516.74. The tech-heavy Nasdaq Composite declined 530.80 points, or 4.7%, to 10809.23, off 33% from its November record.

Markets have swung wildly this year as investors scramble to decipher how rapidly the central bank will raise interest rates in an attempt to tame sky-high inflation. Rock-bottom rates and other stimulative policies helped keep the economy—as well as markets—afloat as the arrival of the Covid-19 pandemic idled businesses and threw people out of work.

Now, the Fed is trying to tame surging prices by unwinding that easy-money policy. The Fed will begin its latest two-day policy meeting Tuesday, and most investors believe that the central bank will announce Wednesday it is raising its benchmark interest rate by half a percentage point.

But expectations that the Fed will be forced to move even more aggressively this year have risen since Friday’s inflation data, which showed U.S. consumer prices climbed 8.6% year over year in May, the fastest such increase since 1981. The report jolted markets and intensified fears that the campaign of monetary tightening could tip the economy into a recession.

“If inflation is going higher, the Federal Reserve has no choice but to raise interest rates,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “The higher the Federal Reserve needs to raise interest rates, and the longer they need to keep raising interest rates, the more likely it is that we go into a recession.”

On Monday, futures bets showed traders assigned a roughly 85% probability that the Fed will raise its benchmark short-term interest rate by at least 2.5 percentage points by the end of the year from its current range between 0.75% and 1%, according to CME Group. That would equate to at least a half-percentage-point rate increase at every Fed meeting this year. On Friday, traders placed the chances of that at 50%, according to CME Group.

“It seems as though inflation is staying for longer than expected,” said Kiran Ganesh, a multiasset strategist at UBS. “People are now beginning to fear that the Fed will have to go further or faster in terms of interest rates.”

As markets react to interest-rate hikes and the threat of a recession, stocks are dropping closer to bear-market territory. WSJ’s Gunjan Banerji explains what it takes to push stocks back into a bull market and why it is hard to predict when they’ll turn around. Illustration: Jacob Reynolds

Government bond yields surged Monday as investors worried that persistent inflation could prompt the Fed to raise rates higher and faster than had been expected. The yield on the benchmark 10-year U.S. Treasury note rose to 3.371% Monday, its highest closing level since 2011, from 3.156% Friday. It was its largest one-day yield gain since March 2020.

U.S. tech stocks, which soared throughout the pandemic, notched big declines. Apple shares fell 3.8%, while Amazon.com shares lost 5.5%. Chip maker Nvidia slid 7.8% and Tesla dropped 7.1%. Meta Platforms, the parent company of Facebook, lost 6.4%.

“This is what you call a bear market, where fear is taking place and pushing people out of the market and having people empty up portfolios and capitulate,” said Todd Morgan, the chairman of Los Angeles-based Bel Air Investment Advisors. 

Still, Mr. Morgan said developments in the next month or two could help damp inflationary pressures, such as lower gasoline demand after the summer and slowing demand for houses due to rising mortgage rates. 

“China opening up is a big deal, too,” he said, as that would help ease supply-chain constraints. Figures last week showed Chinese exports to the rest of the world surged in May as Covid-19 restrictions eased, adding to signs of economic recovery there.

“We’re in a brave new world right now. I don’t think anyone can accurately predict inflation one year from now,” Morgan Stanley CEO James Gorman said at a conference Monday.

Stock indexes in Asia weakened on Monday, with Japan’s Nikkei 225, South Korea’s Kospi Composite and Hong Kong’s Hang Seng all retreating by around 3% or more.

Photo: Eugene Hoshiko/Associated Press

In currency markets, the dollar gained against a range of its peers with the WSJ Dollar Index up 0.9% to 97.66. Higher U.S. interest rates typically boost the value of the dollar.

Stock markets abroad were jolted by fears of tighter U.S. policy and a potential growth slowdown in the world’s biggest economy. The pan-continental Stoxx Europe 600 fell 2.4% to its lowest closing value since March 2021, while the U.K.’s FTSE 100 index fell 1.5%. 

Stock indexes in Asia weakened, with Hong Kong’s Hang Seng, Japan’s Nikkei 225 and South Korea’s Kospi Composite all retreating by around 3% or more. In mainland China, the blue-chip CSI 300 index lost about 1.2%. 

—Quentin Webb, Dave Sebastian and Megumi Fujikawa contributed to this article.

Write to Chelsey Dulaney at chelsey.dulaney@wsj.com, Justin Baer at justin.baer@wsj.com and Karen Langley at karen.langley@wsj.com

Corrections & Amplifications
Todd Morgan, the chairman of Bel Air Investment Advisors, said, “China opening up is a big deal, too.” The quotation was misattributed to Morgan Stanley CEO James Gorman in an earlier version of this article. Kiran Ganesh is a multiasset strategist at UBS. An earlier version of this article incorrectly referred to Mr. Ganesh on second reference as Mr. Kiran. (Corrected on June 13)

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