What the stock market is saying about the economy
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.