As traders returned from a long weekend, stocks rose Tuesday, recouping some of the losses they suffered last week, which was the worst week for the S&P 500 since March 2020.
The S&P 500 rose by 2.45% to 3,764.84, its single best day in three weeks after dropping 5.8% last week. The Nasdaq Composite rose 2.5%, to 11069.30, and the Dow was up 2.2%, over 643 points, to 30,531,77. That was its best single day in almost a month and a half.
Bitcoin was back up, over $21,000, after a brief collapse over the weekend sent prices below $18,000 for the first time since December of 2020. Treasuries climbed, with the benchmark 10-year increasing to nearly 3.3% and US crude was up 1.5% to over $111 per barrel.
Tuesdays recovery was a brief respite from what had been a terrible week of bad news and worsening data that exceeded all expectations, amid heavy selling. The S&P 500 sank into Bear territory and stayed there, after the Inflation report came out worse than all expectations, the Fed responded with an aggressive policy tightening they indicated would continue, only to have the process repeated in other countries across the globe.
Fed Chair Jerome Powell is scheduled to go before Congress Wednesday and Thursday for his semi-annual address, where he will probably expound at length on the unexpectedly bad inflation, the aggressive tightening he foresees, and the threat of recession from it.
Already analysts at major Wall Street firms have downgraded growth forecasts, increasing the risk of a recession.
Bank of America economists wrote, “The most likely outlook is very weak growth and persistently high inflation. We see roughly a 40% chance of a recession next year. Our worst fears around the Fed have been confirmed: they fell way behind the curve and are now playing a dangerous game of catch up.”
Others are even more pessimistic. Deutsche Bank’s base case sees a recession starting by the third quarter of 2023, as GDP drops from 1.8% to only 1.2%. Goldman Sach’s analysts, “now see recession risk as higher and more front-loaded,” according to the firm’s chief economist Jan Hatzius, who now has raised the likelihood of recession from 15% to 30%.
The rising risk of a recession means the S&P 500’s downside might not be over just yet. The S&P’s bear market declines since WWII have averaged 29.6%, and the average duration of a bear market has been 11.4 months. So far the S&P is only been down 22%. If, however the US enters a recession while in a bear market, then the S&P average fall rises to 34.8%, and it lasts nearly 15 months.
