Stocks sink to fresh 2022 lows to end dismal month as recession fears mount

Wall Street is at its worst level in nearly two years on Friday as it nears the end of what has been a miserable month for markets around the world.

The S&P 500 closed up 1.5% at 3,585 after trading between slight losses and gains during the morning. This is the lowest level since the beginning The coronavirus crash of 2020 and his third straight losing quarter.

The Dow Jones Industrial Average fell 500 points, or 1.7%, and the Nasdaq Composite fell 1.5%.

Global inflation

The main reason for this year’s struggle for financial markets was the fear of a possible recession, as interest rates soar hoping to beat the highest inflation in 30 years.

The Federal Reserve has been at the forefront of a global campaign to slow economic growth and harm the labor market enough to reduce inflation, but not enough to cause a recession. More data came in on Friday suggesting the Fed will tighten the brakes on the economy, raising the risk of a recession.

The Fed’s preferred measure of inflation showed last month that it was worse than economists had expected. This should keep the Fed on track keep raising rates and keep them high for some time, as they have loudly and repeatedly promised to do.

Vice Chairman Lael Brainard was the latest Fed official on Friday to insist the central bank would not cut rates prematurely, dashing Wall Street’s hopes of a “reverse” to lower rates as the economy slows.

“The Fed is not going to do a ‘reversal,’ and we’re in for more monetary tightening (both domestically and internationally),” Vital Knowledge analyst Adam Crisafulli said in a research note.

Crisafulli argued that the Fed’s aggressive moves are working and that prices are about to stabilize. “Disinflationary pressures, which are already evident throughout the economy, are becoming stronger,” Crisafulli said. “Housing, rent, delivery, goods, clothing, cars, etc. – all these categories … are now experiencing intensive disinflation (or complete deflation).

Other analysts have a less positive outlook.

“At this point, it’s not a question of whether we’re going to have a recession, but what kind of recession we’re going to have,” said Sean Sun, a portfolio manager at Thornburg Investment Management.

A double whammy for stocks

With the exception of financial companies such as banks, brokerages, or mortgage companies, higher interest rates usually beat stock prices. Another market lever that also looks at risk is earnings, as a slowing economy, high interest rates and other factors weigh on record high corporate profits.

Cruise ship operator Carnival fell 21% in one of Wall Street’s worst losses after it reported a bigger-than-expected quarterly loss and revenue that missed expectations.

Nike tumbled 12.1% in what could have been its worst day in two decades after the company said its profitability had fallen over the summer due to discounting needed to clear suddenly overcrowded warehouses. Nike’s footwear and gear inventory is up 44% year-over-year.

US dollar a powerful surge against other currencies will also hurt Nike. Its global revenue grew by only 4% instead of 10% if the value of the currency had remained the same.

Glimpses of hope

Nike isn’t the only company seeing its stockpile. So are a few big-name retailers, but such bad news for businesses could actually mean some relief for shoppers if overstocking leads to higher discounts. Friday’s report on the Fed’s preferred inflation measure showed some glimmers of optimism, showing a slowdown in goods inflation even as growth in services prices accelerated.

Another report on Friday also offered good news. A measure of consumer sentiment showed that US expectations for future inflation fell in September. This is very important for the Fed because rigid expectations of higher inflation can create a debilitating, self-reinforcing cycle that will make it worse.

Treasury yields edged lower on Friday, easing pressure on markets.

The yield on the 10-year Treasury fell to 3.75% from 3.79% late on Thursday. The two-year yield, which more closely matches expectations for Fed action, fell to 4.16% from 4.19%.

Still, a long list of other concerns continue to hang over global markets, including rising tensions between much of Europe and Russia after invasion of Ukraine. The UK government’s controversial plan to cut taxes has also recently roiled bond markets on fears it could further worsen inflation. Bond markets only calmed down a bit afterwards Bank of England promised to buy mid-week, but it takes a lot of UK government bonds to lower yields.

The stunning and rapid growth of the US dollar against other currencies, meanwhile, raises the risk of creating such a strain that somewhere in global markets something cracks.

Stocks around the world were mixed after a report showed inflation in the 19 countries that use Europe’s euro currency hit a record, and data from China suggested factory activity there weakened.