Recession fears spook investors

The pressure has been building on the US stock market with each inflation report and pending interest rate hike.

On Monday, that pressure boiled over, as US stock market investors rushed to the exits, sending the S&P 500 index into the bear market territory.

The key benchmark index sank by 3.9 percent at the first opportunity for investors to trade after news broke on Friday of an 8.6 percent increase in the consumer price index.

It is the first time the S&P 500 has entered a bear market－a close of 20 percent or more below a recent high－since the market plunge at the outset of the COVID-19 pandemic, early in 2020.

The S&P fell 151.23 points on Monday to 3,749.63 and dropped by 21.8 percent below its record set early this year; 495 of its 500 components closed lower.

"We are starting to see after that consumer price index … really, really extreme tails" played in markets, Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets, told Yahoo Finance Live on Monday.

"You're going to start to see more of that," she said. "You either de-risk, de-gross, or you have to place some sort of bet to protect yourself when potentially the CPI surprises even more."

The Dow Jones Industrial Average slipped 2.8 percent on Monday, while the tech-heavy Nasdaq composite, already in a bear market, dropped 4.7 percent.

Prices fell worldwide in a rout for everything from bonds to bitcoin, as the US Federal Reserve is expected to raise interest rates on Wednesday.

"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," Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, told The Wall Street Journal.

Jeremy Siegel, a professor of finance at the Wharton School since 1976, told CNBC on Friday: "I actually think the market is already discounting a recession in 2023. It's being priced at that level today.

"We're pricing in a mild recession. I'm not saying how severe the recession actually will be," he added.

"With this latest (inflation) number, the Fed is really going to go for it, and this will cause an economic slowdown," Julian Howard, a GAM investment manager, told the Financial Times.

Some economists have speculated that the Fed could raise the federal funds rate by as much as three-quarters of a point, instead of the widely expected half-point.

Sharpest drops

Some of the sharpest drops hit what had been big winners in the low-rate era, such as high-growth technology stocks.

US tech stocks, which soared throughout the pandemic, absorbed big declines. Apple shares fell by 3.8 percent, and Amazon lost 5.5 percent. Chipmaker Nvidia slid 7.8 percent, and Tesla dropped by 7.1 percent. Meta Platforms, Facebook's parent company, lost 6.4 percent.

The realization that inflation is accelerating, not peaking, is also sending US bond yields to their highest levels in more than a decade. The two-year Treasury yield climbed to 3.36 percent from 3.06 percent late Friday.

The 10-year Treasury yield jumped to 3.37 percent from 3.15 percent. The higher level will make mortgages and many other kinds of loans more expensive.

The higher yields also mean prices are falling for bonds, a painful hit for older and more conservative investors who depend on them as the safer part of their nest eggs.

The gap between the two-year and 10-year yields also has narrowed sharply, a signal of a weakening outlook on the economy. When the two-year yield tops the 10-year, it is often seen as foretelling a recession.

Cryptocurrencies, which soared early in the pandemic, took big hits. Bitcoin tumbled more than 14 percent from a day earlier, dropping below $23,400, according to Coin-Desk. It's back to where it was in late 2020 and down from a peak of $68,990 late last year. The crash resulting from the coronavirus pandemic in early 2020 was Wall Street's last bear market.

Agencies contributed to this story.