Dow futures tumble 500 points with the S&P 500 poised to fall back into bear market territory

U.S. stock futures dropped on Monday morning, putting the S&P 500 on track to fall back into bear market territory and possibly to a new low for 2022. A jump in short-term rates drove the negative sentiment as investors still reeling from a hotter-than-expected inflation report on Friday braced for the Federal Reserve to raise rates later in the week.

S&P 500 futures fell 2.2% after the benchmark closed Friday down 19% from its record high and just about 2.4% above its sell-off low from last month. The S&P 500 briefly traded in a bear market — down 20% from its high — about three weeks ago but failed to close in that territory. The stock market then bounced in late May until the selling returned last week.

Futures tied to the Dow Jones Industrial Average dropped 539 points, or 1.71% after it posted its worst week since January. Nasdaq 100 futures tumbled 2.7%.

The short-term 2-year Treasury yield rose by 15 basis points to 3.2% Monday, reaching its highest level since 2007 as investors bet the Fed may have to get even more aggressive to squash inflation. At one point in the session, the 2-year rate traded above its 10-year counterpart for the first time since April, a so-called yield curve inversion which is seen as an indicator of a recession.

The major averages last week posted their biggest weekly declines since late January as investors grew increasingly concerned rising inflation will tip the economy into a recession. The Dow and S&P 500 fell 4.6% and 5.1%, respectively, while the Nasdaq Composite lost 5.6%. A chunk of those losses came Friday, when hotter-than-expected U.S. inflation data spooked investors. The Dow dropped 880 points, or 2.7%. The S&P 500 and Nasdaq lost 2.9% and 3.5%, respectively.

“The odds of a ‘June Swoon’ straight to 3,400 have gone up significantly, in our view,” wrote Jonathan Krinsky, technical analyst for BTIG. The S&P 500 closed Friday at 3,900.86.

“We thought a momentum reversion where winners got bought and losers sold would create chop at the index level, but last week is a reminder that the risk continues to be to the downside,” Krinsky added.

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The Bureau of Labor Statistics reported Friday that the U.S. consumer price index rose last month by 8.6% from a year ago, its fastest increase since December 1981. That gain topped economists’ expectations. The so-called core CPI, which strips out food and energy prices, also came in above estimates at 6%.

On top of that, the preliminary June reading for the University of Michigan’s consumer sentiment index registered at a record low of 50.2.

Gasoline prices topped $5 a gallon over the weekend, further fanning fears over rising inflation and falling consumer confidence.

Shares that would be hurt the most in a recession led the losses in premarket trading Monday with shares of Marriott, Hilton and Delta Air Lines down at least 3%.

Tech shares were also taking hits with Amazon.com, Nvidia and Netflix also down at least 3%.

Bitcoin tumbled below $24,000 on Monday after ending Friday above $29,000 as risk-averse investors dumped crypto amid rising rates.

“The cryptocurrency bitcoin has been a great gauge of investors’ risk threshold for equities,” wrote J.C. O’Hara, chief market technician at MKM Partners. “Plenty of longs who bought in last year are still trapped, and thus we could easily see a pullback to 19,500. That would be a bearish read through for stocks.”

The Fed is expected to announce at least a half-point rate hike on Wednesday. The Fed has already raised rates twice this year, including a 50-basis-point (0.5 percentage point) increase in May in an effort to stave off the recent inflation surge. Though some economists after the hot CPI report believed the Fed could even raise rates by 0.75% this week.

“May’s CPI report showed scant signs of inflation peaking, though we still expect peaking soon. The report also suggests a more hawkish Fed and higher recession risk,” wrote Ed Yardeni, president of Yardeni Research.

“Investor and consumer sentiment both have soured. But this time, pervasive bearishness may not be as useful a contrarian bullish signal as in the past,” he said, adding that the firm now sees a 45% chance of a “mild recession;” that’s up from the previous forecast of 40%.

Stocks have had a tough year as recession fears rise along with consumer prices. The S&P 500 is down 18.2% year to date through Friday’s close. It’s also 19.1% below an intraday record set in January. The Dow has fallen 13.6% in 2022, and the Nasdaq Composite is deep in bear market territory, down 27.5% this year and trading 30% below an all-time high set in November.

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