Wall Street entered a bear market on Monday as the S&P 500 sank 3.9 per cent, bringing it more than 20 per cent below the record high it set in January.
Fears about a fragile economy and stubbornly high inflation have hit the stock market in recent days and sent Treasury yields surging to their highest levels in years.
A report last week that inflation was getting worse, not better as many had hoped, sent a chill through markets that carried over into this week.
Investors expect the Federal Reserve will become more aggressive to get inflation under control, even if it risks a recession.
“The best thing people can do is to not panic and don’t sell at the bottom,” said Randy Frederick, managing director of trading and derivatives at the Schwab Centre for Financial Research.
"And we’re probably not at the bottom.”
Some economists are speculating that the Fed on Wednesday may raise its key rate by three quarters of a percentage point. That is triple the usual amount and something the Fed has not done since 1994.
No one thinks the Fed will stop there, with markets bracing for a series of abnormally high rises.
There has also been discouraging signals about the economy and corporate profits, including a record-low preliminary reading on consumer sentiment soured by high petrol prices.
The economy is still holding up overall, but the danger is that the job market and other factors are so hot that they will feed into higher inflation.
That is why the Fed is in the middle of a rapid turn away from the record-low interest rates it engineered earlier in the pandemic, which propped up stocks and other investments.
Wall Street’s sobering realisation 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 shot to 3.27 per cent from 3.06 per cent late on Friday after touching its highest level since 2007, Tradeweb says.
The gap between the two-year and 10-year yields has also narrowed, in a sign of weakening optimism about the economy.
If the two-year yield tops the 10-year, some investors will regard it as a sign of a looming recession.
Some of the biggest hits came for cryptocurrencies, which soared early in the pandemic as ultra-low rates encouraged some investors to spend on the riskiest investments.
Bitcoin tumbled more than 16 per cent from a day earlier and dropped to $23,278, according to Coindesk.
It is back to where it was in late 2020 and down from a peak of $68,990 late last year.
The last bear market was not long ago but it was unusually short, lasting only about a month in early 2020.
The S&P 500 came close to a bear market last month but it did not finish a day below the 20 per cent threshold.