As inflation has risen to 7 percent, Americans are grappling with the pain. While raising interest rates could help ease the pain, they can limit economic activity, which can hurt stocks. The spasm on Wall Street is a reflection of caution on the part of investors. According to Wayne Wicker, chief investment officer at MissionSquare Retirement achieving growth under these conditions will be tough.
Tech stocks lead the decline
While many U.S. stock indexes rose in the morning, tech stocks led the decline on Thursday, with major benchmarks falling across industries. Even though investors initially sent the Dow Jones industrial average up 200 points, they soon started selling big tech stocks, including Apple and Microsoft. Shares of Apple fell by 2.2 percent and Microsoft was down 1.5 percent. The S&P 500 index ended the day down 1.3%, with seven of its 10 industry sectors falling. In contrast, suppliers of raw materials gained 3.1 percent.
The recent decline in technology stocks has investors worried. Big Tech stocks benefit from low interest rates, but investors moved their money away from these companies in April. One sector that did not see a decline was consumer staples, which includes personal and household goods makers. While utilities and telecoms did hold up better than the overall market, the tech sector has seen a big drop. In addition, Etsy Inc. and eBay Inc. have both posted Q2 revenue estimates that are lower than expected.
Fed’s rate moves
The S&P 500 fell 1% Thursday as investors gauge the likelihood of an economic slowdown. Despite the fact that unemployment remains low, the U.S. economy is experiencing its strongest inflationary rebound in four decades. Fed policymakers must reinforce their price stability credentials to avoid the onset of an even larger slowdown, or the financial system could be damaged. Here are some key factors to watch out for in 2019.
The S&P 500 fell 1% Tuesday, while the Nasdaq and other major stock indexes also closed in the red. Fears of a recession have dampened investors’ risk appetite. However, the three major U.S. stock indexes pared losses by midday trading. The blue-chip Dow turned positive for the first time since the start of the year, and the S&P 500 closed 2.2 points below its all-time high. Still, the S&P 500 has officially entered a bear market since Jan. 3.
Flattening interest rate curve predicts recession
Some economists say that a flattening interest rate curve precedes a recession. This is because the yield curve – which plots the Treasury rate’s yield on short-term versus long-term bonds – makes it harder for banks to make money. Historically, they have made money by lending money for shorter periods at low rates and borrowing longer-term at higher rates. During a recession, however, these two practices do not work.
Interestingly, a flattening interest rate curve has the ability to predict a recession four quarters ahead. The U.S. economy experienced the longest peacetime expansion in its history. Before the 1990-91 recession, the yield spread fell to -15 basis points, which suggests a thirty percent chance of recession. This spread is now around 100 basis points, which implies less than 10% of a chance of a recession.
Investing in stocks during a recession
If you’re thinking of investing in stocks during a recession, you’re probably wondering whether it’s a good time. Stocks are a great investment option because they offer superior long-term total returns, inflation protection, and income generation. Plus, they tend to produce higher dividend yields than bonds do. Unfortunately, they can lose their luster during a recession and can swing dramatically in value. For this reason, you should over-weight bonds and cash as a means of protecting yourself from losing money in a recession.
Some sectors perform well during a recession, including healthcare, utilities, and consumer goods. These sectors often outperform other sectors. In addition to healthcare and consumer goods, these industries are often recession-proof because people will continue to spend money on these essentials. This means healthcare and utilities stocks tend to outperform other sectors. Even when the economy is in bad shape, these sectors can still help you make money.