Jun 14, 2022 - Economy

What the stock market is saying about the economy

Illustration of a bear trap with dollars in it

Illustration: Aïda Amer/Axios

Companies whose financial fortunes mirror the ups and downs of the actual economy led the market plunge into bear market territory Monday.

Why it matters: The growing sell-off in so-called cyclical stocks — which until recently have held up reasonably well — suggests that investors are entering a new phase of concern about the economy.

Driving the news: The S&P 500 fell 3.9% Monday, its worst daily drop since May 18, when it slumped 4%. That pushed the benchmark index down 21.8% from its Jan. 3 high, confirming stocks have been mired in a bear market almost all year.

Yes, but: The drop was even uglier for ...

Small-cap stocks: The Russell 2000 index of smaller stocks got smoked, falling 4.8%, its worst day since June 2020 during the heat of the COVID crisis.

  • Stocks in this index tend to be more closely reliant on the health of the U.S. domestic economy than the global giants in the S&P 500, which have customers worldwide.

Energy stocks: Energy stocks, which have been the star performers of the stock market this year as oil and gas prices have soared, saw the worst losses in the S&P yesterday, dropping 5.1%.

  • This suggests investors now believe the Federal Reserve's effort to slow the economy and curtail inflation will work — though likely at the cost of a sharp slowdown in the economy and rising unemployment that will force consumers to consume less fuel.

Travel and entertainment: Casinos, airlines, cruise lines and booking services all slumped hard, as the expectations of a consumer slowdown grow.

State of play: Some companies did slightly better, but they were firms that tend to fare well in a recession when Americans tighten their financial belts.

  • They include peanut butter & jelly giant J.M. Smucker Company, McDonald's, Coca-Cola and dirt-cheap retailer Dollar Tree.

The bottom line: In isolation, the meanderings of the stock market don't tell you a lot about the economy. But the official arrival of a bear market comes along with a Fed intent on raising rates fast and a historic energy shock.

  • Taken together, it all adds to evidence suggesting the next year is going to be a tough one for the U.S. economy.
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