Stocks edge lower as Fed decision looms over markets.
By Eshe Nelson and Daisuke Wakabayashi
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Stocks on Wall Street were lower on Tuesday but far calmer than the day before, when a rush of selling pushed the S&P 500 into a bear market, as the Federal Reserve’s upcoming interest rate decision kept investors on edge.
After vacillating between gains and losses, the S&P 500 ended the day down 0.4 percent. European markets were sharply lower, reversing earlier gains, and stocks in the Asia-Pacific region also dropped.
Global markets are on shaky ground as the highest inflation in decades, supply-chain shortages and geopolitical tensions weigh on the outlook for growth around the world.
In the United States, inflation is accelerating at its fastest pace since 1981, amplifying worries about the direction of the economy as surging prices squeeze household budgets and company profits. As gas, food, rent and other expenses rise sharply, the Fed, at its meeting on Wednesday, is expected to discuss making the biggest interest rate increase since 1994. It will announce its policy decision on Wednesday afternoon, and many investors are betting that rates will rise three-quarters of a percentage point.
The turmoil in recent days is a reaction to data, released on Friday, that showed consumer prices in May rose 8.6 percent from a year earlier, said Hugh Gimber, a strategist at J.P. Morgan Asset Management in London. Before that, “the narrative was inflation has peaked, it’s coming down, and therefore the pressure is going to ease on the Fed,” he said.
“That got completely knocked on its head,” he added. “It was a really ugly inflation report, and it’s put the Fed under real pressure” to demonstrate how serious it is about bringing inflation down.
Mr. Gimber said he also expected the Fed to raise rates by three-quarters of a point on Wednesday. The policymakers’ message “is going to be that nothing is off the table until we see signs that the inflation path is improving,” he said.
But that’s making investors nervous. If the central bank moves too aggressively to rein in inflation, it could put the brakes on the U.S. economy and cause a recession.
Such concerns have driven the sell-off in markets in the United States this year. On Monday, the S&P 500 lost 3.9 percent, wiping out $1.28 trillion in market value. Since reaching a record high in January, the S&P 500 has fallen just over 22 percent, the seventh bear market in the last 50 years.
The weakness in stock markets continued in the Asia-Pacific region on Tuesday, although some markets pared their losses by the close. Japan’s Nikkei index was down 1.3 percent, while Australia’s key stock index tumbled about 3.5 percent, the biggest single-day drop in two years.
Stock indexes across Europe opened higher but then slumped. The Stoxx Europe 600 fell 1.3 percent after climbing as much as 1 percent, extending its losses to a sixth consecutive day.
Investors have been trying to make sense of what’s happening in the global economy.
On Monday, the credit rating firm Fitch cut its 2022 forecast for global gross domestic product to 2.9 percent, from a March estimate of 3.5 percent. It was just the latest in a series of global economic downgrades as Russia’s protracted war in Ukraine strains already stretched global supply chains, disrupts trade and pushes up the prices of oil, wheat, metals and other essential commodities.
As inflation surges, central banks around the world have been moving to raise rates. On Thursday, the Bank of England is expected to raise its benchmark rate for a fifth consecutive meeting. Last week, the European Central Bank said it would raise its rates next month for the first time in more than a decade.
With the global economic outlook weakening, traders are questioning how far central banks can go in raising rates to impede inflation without worsening the stress on companies and households.
“It’s really difficult for central banks to acknowledge that growth and inflation trade-off until inflation has peaked,” Mr. Gimber said. Later in the year, central banks may take a softer tone, but in the meantime, “with inflation heading in the wrong direction, they have to be focused on sending the signal that they are doing everything within their control to tackle that,” he said.
In its forecasts, Fitch cited concerns about “restrictive” monetary policy and inflation, noting that the supply disruptions from the war between Russia and Ukraine are having a “swifter impact on European inflation than expected.”
China is also complicating the picture. As the Chinese government doggedly pursues a zero-Covid strategy, the resulting lockdowns and restrictions have crimped China’s growth and added to the global supply chain woes. Chinese officials are increasingly concerned about the state of their economy, raising doubts that the country will meet its growth targets.
What some analysts are focused on after Wall Street’s meltdown.
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By Isabella Simonetti
The bear market is officially here, with the S&P 500 ending trading on Monday down nearly 22 percent from its record.
Wall Street’s analysts continue to voice concerns about rising interest rates, high inflation and the possibility of a recession. Adding to the pressure is the news that the Federal Reserve will discuss raising its benchmark rate by as much as 0.75 percentage points when it meets on Wednesday. A jump of that size would be the largest interest rate increase since 1994.
Here’s what some analysts had to say on Tuesday, a day after the S&P 500 dropped into a bear market:
The potential 75 basis-point increase could spark further alarm among investors. The increase “risks conveying a whiff of panic that the central bank thinks it is too far behind the curve,” the Evercore analysts Krishna Guha and Peter Williams wrote. “When the market thinks the central bank is panicking, the market panics too.”
The economy is “headed for a slow train wreck,” wrote Sebastian Galy, senior macro strategist at Nordea Asset Management wrote. “The Fed may be overtightening monetary policy which could lead to a recession, a depressed outlook for earnings, and hence a correction in expensive US equities, especially Tech.”
Bank of America’s stock market strategists described a divergence of investing behavior in the past month. The bank said that overall its clients were net sellers of stocks last week, pulling $1.7 billion from the market, which was the most in a single week since early April, but all of the selling was from hedge funds and other professional investors. Individual investors, conversely, were net buyers of stocks last week.
“Retail clients have been more aggressive buyers of dips this year after missing out on what was generally a successful strategy post-Global Financial Crisis,” the strategist Jill Carey Casey wrote in the report.
Some also commented on the performance of cryptocurrencies, which experienced significant drops despite their separation from “traditional assets.” Bitcoin fell 15 percent on Monday and was down by another 6.86 percent on Tuesday at $22,073, according to the crypto news site CoinDesk.
“In such a broad-based selloff, many would have been interested in how crypto assets would hold up, supposedly uncorrelated with traditional assets,” wrote Jim Reid, head of thematic research at Deutsche Bank. “However, digital assets did not escape the wrath of plummeting risk sentiment. There were reports that some exchanges were having trouble liquidating holdings of various crypto assets. This is a classic deleveraging and unwinding of a bubble trade.”
Stephen Gandel contributed reporting.
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Coinbase says it will cut 18 percent of its work force.
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By Isabella Simonetti
The cryptocurrency exchange Coinbase is cutting 18 percent of its work force amid depressed markets and concerns of a looming recession.
The company’s chief executive, Brian Armstrong, informed employees of the layoffs in a note Tuesday morning, saying the company “over-hired” its staff during a crypto boom. The company will let about 1,100 people go, reducing its work force to 5,000.
“At the time, we were in the early innings of the bull run and adoption of crypto products was exploding,” Mr. Armstrong wrote. “There were new use cases enabled by crypto getting traction practically every week.”
The company had 1,250 employees at the beginning of 2021, the note said, with Mr. Armstrong saying the number “grew too quickly.”
Coinbase said on June 2 that it would rescind job offers and extend its hiring freeze to battle the economic downturn. The layoff announcement on Tuesday signaled further stress on the platform as market drops hit cryptocurrency assets.
Benefits for employees who are laid off include at least 14 weeks’ severance pay, four months of COBRA health coverage in the United States, four months of mental health support and assistance finding new work, according to Mr. Armstrong’s memo.
1/ Today I shared that I've made the difficult decision to reduce the size of our team at Coinbase by about 18%. The broader market downturn means that we need to be more mindful of costs as we head into a potential recession.
— Brian Armstrong (@brian_armstrong) June 14, 2022
“The broader market downturn means that we need to be more mindful of costs as we head into a potential recession,” Mr. Armstrong wrote on Twitter.
U.S. efforts to help supply Europe with natural gas take a hit.
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By Clifford Krauss
HOUSTON — Ever since Russia invaded Ukraine in February, Europe has desperately tried to find new sources of natural gas, including from the United States, to reduce its dependence on Russian natural gas supplies.
Those efforts took a hit on Tuesday when an American gas company announced that it would take several months before it could repair a Texas export terminal that suffered a fire and explosion last Wednesday.
The suspension — which would affect roughly 14 percent of U.S. liquefied gas exports — was compounded by news that the Russian energy giant Gazprom would reduce its gas shipments to Germany via the Nord Stream pipeline.
The two announcements sent European gas prices 16 percent higher on Tuesday, since Europe’s prices are set regionally, not globally like oil. Natural gas prices in the United States moved in the opposite direction, plummeting more than 16 percent.
When an explosion damaged part of the Freeport LNG terminal this month, officials said it would probably take three weeks to return the plant to normal functions. Gas prices, which had more than doubled since last year, dropped modestly.
But on Tuesday, the company changed its public outlook and announced that it hoped a partial restart in 90 days was feasible.
“At this time, completion of all necessary repairs and a return to full plant operations is not expected until late 2022,” the company said in a statement.
The Freeport facility is one of seven active export terminals that send supercooled gas around the world in supertankers.
The temporary closing, by reducing how much gas can be exported, will add natural gas supplies in the United States, bringing some relief to residential electricity customers as well as to refineries and other industrial plants that use gas for power and as a vital raw material. Gas that otherwise would have been exported will go into storage for use next winter since households in the United States will use less natural gas for heating during the summer months.
“It’s significant for both the U.S. market and the global market,” said Lindsay Schneider, a natural gas expert at RBN Energy, a Houston consultancy. “It could mean lower prices here as more gas is available to refill storage inventories, and for global markets it means a loss of supply and potentially stronger prices in Europe and in Asia.”
European countries are expanding their gas import facilities and pipelines, and they are lobbying Qatar, Australia and other exporters to hurry up and ship more gas. But Europe is in competition with Asian countries that look to gas to replace coal, a major pollutant of city air around China and India.
While international markets are tight, the Freeport accident and decline in prices could bolster critics who say gas exports are raising domestic prices, which could go lower permanently if less were exported.
That the closing of one export terminal “is having such a significant impact to prices” should be “alarming to federal policymakers,” said Paul Cicio, president of the Industrial Energy Consumers of America, a lobbying group.
Oil and gas companies counter that there is plenty of gas in shale fields around Pennsylvania, Texas, New Mexico and Arkansas for export and domestic use if only regulators would approve the building of more pipelines.
While gasoline prices attract the most headlines, natural gas prices have surged over the last year and reached their highest level since 2008 last May, though they have eased in recent weeks.
The explosion at the Texas plant, on Quintana Island, did not cause any injuries. The fire ignited in some pipes between gas storage tanks and dock facilities used to transport the gas abroad. Experts say it appears that the explosion occurred because of a rupture of piping and the ignition of a gas vapor cloud.
Various state and federal agencies are investigating the explosion and fire, including the Pipeline and Hazardous Materials Safety Administration, better known by its acronym PHMSA. PHMSA has wide discretion in deciding whether a facility can come back on line, sometimes overriding an operator’s assessment.
Energy experts warned that problems at the Texas plant could take a long time to fix. A fire at the Kinder Morgan terminal in Georgia took part of its operations off line for about 18 months because of difficulties with finding parts.
The Freeport plant has had problems over the last year with delayed maintenance and intermittent outages that were thought to be connected with impurities in some of its gas supplies.
The United States has long exported gas to Canada and Mexico by pipeline, while liquefied natural gas exports have gradually grown over the last decade as domestic production has increased in shale fields around the country.
In recent years most of the liquefied gas exports have gone to Asia, but since the Russian invasion of Ukraine, there has been a shift in sales to Europe, which has relied on Russia for 40 percent of its gas supplies.
Four new American export terminals are under construction, while more than a dozen are waiting for the go-ahead from regulators and investors.
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Russian gas flows to Germany get snarled in Canada.
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By Stanley Reed
A machine used in shipping Russian natural gas to Germany has been caught up in Canadian sanctions imposed against Moscow, prompting a steep drop in flows in a key Russian pipeline and contributing to a surge in European natural gas prices on Tuesday.
Gazprom, the Russian gas monopoly, said on Twitter on Tuesday that it was reducing the amount of gas it sends to Germany via the Nord Stream pipeline by about 40 percent because a turbine sent for repairs had not been returned “in due time.” It said it could not provide the amount of gas normally sent to Germany without the machine.
Siemens Energy, the Munich-based maker of the turbine, largely confirmed Gazprom’s account. It said in a statement that it had overhauled the turbine at a specialist facility in Montreal but that it was “currently impossible” to return it to Gazprom “due to the sanctions imposed by Canada.”
Siemens Energy said it had informed the Canadian and German governments of the situation, and was “working on a viable solution.”
The snafu helped lift natural gas futures prices 16 percent on the Dutch TTF exchange, to about 97 euros per megawatt hour. That is less than half the high reached in March, when fears of a cutoff by Moscow were running strong, but still about five times the price of a year ago.
Adding further upward pressure to prices, a major liquefied natural gas export facility in Texas, called Freeport LNG, said Tuesday that it would require 90 days, much longer than initially expected, before even returning to partial operations after a fire last Wednesday. In recent months, Freeport LNG has been a large exporter of natural gas to Europe and elsewhere, helping to ease a supply crunch.
The two events appeared to pose little immediate threat of causing Germany or Europe to run out of the fuel anytime soon. Summer is a season of relatively low demand for gas, which is used for heating, and Europe has been rapidly building up its stocks in preparation for next winter.
“There are no imminent supply issues,” said Henning Gloystein, the director for energy, climate and resources at Eurasia Group, a political risk firm.
And in a tweet on Tuesday, the German ministry responsible for energy said the security of natural gas supplies was “unchanged guaranteed.”
However, with the war in Ukraine grinding on and Russia still a key supplier of gas to Europe, any interruption rapidly translates into market turbulence.
Prodded by the European Union, Europe has been rapidly building up its gas reserves, hoping to head off the fear of shortages or a cutoff by Russia that drove up prices to astronomical levels, beginning last summer.
Gas storage facilities in the European Union are about 52 percent full, 10 percent better than a year ago. In recent weeks, Europe has been importing a surplus of gas through pipelines from Russia and elsewhere, and shipments of liquefied natural gas from the United States and other suppliers.
Now, Mr. Gloystein said, the fire at the facility in Texas and Gazprom’s actions on Nord Stream raise doubts about whether the rapid filling of storage will continue, leading to new worries about “more severe price spikes or even supply shortages next winter.”
Christopher F. Schuetze contributed reporting.
How to invest during a bear market.
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By Jeff Sommer
Investing at a chaotic time like this takes fortitude and planning. And if you can handle it, a falling stock market can be an opportunity for people with long horizons.
But I wouldn’t put any money in stocks until I was sure that I could pay my bills first. Once the critical expenses are accounted for, and as long as you can withstand some short-term losses, then broadly diversified, low-cost index funds are a good way to invest in the total stock market. That approach eliminates the risk of holding the wrong specific stocks at the wrong time.
History shows that the U.S. stock market has always recovered from declines in the past. If you put money in stocks, over 10 years you would have been down only 6 percent of the time. Over 20-year periods, the market has never been down. There could always be a first time, of course, and the experience of protracted losses can be excruciating. That’s why it is important to hold high-quality bonds or other safe investments, and to be sure that you have put aside money for emergencies.
Predicting when a bear market will end and the next bull market will start is a fruitless task, with one big exception: Intervention by the Federal Reserve would be a crucial sign of a change in fortune for the stock market. At the moment, the Fed is raising interest rates and taking other measures aimed at slowing the economy and bringing down inflation — and those moves are contributing to the fall in stock market prices.
If the Fed were to change its current approach and start flooding the economy with money again, as it did in 2008 and 2009, and again in March 2020, the odds of a new bull market would rise appreciably. For now, though, battling inflation is the central bank’s main priority, and it has signaled that large rate increases are on the horizon, one of which will probably be announced this week.
Audio produced by Jack D’Isidoro.
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A timeline of bear markets in the United States.
The last bear market, in early 2020, was the shortest on record. The market recouped its losses in six months. Here are other bear markets to know about:
A History of Bear Markets
A History of Bear Markets
A bear market is when stocks fall 20 percent from a recent high. That happened Monday, when the S&P 500 fell 22 percent from Jan. 3.
Here are some past examples of bear markets →
A History of Bear Markets
The last bear market, in early 2020, was the shortest on record. The market recouped its losses in six months. By late March 2021, the bull market was celebrating its first birthday.
A History of Bear Markets
The most infamous bear market was during the Great Depression. Stocks fell 84 percent between Sept. 3, 1929 and June 1932, and they did not fully recover until January of 1945.
A History of Bear Markets
In the 1970s, a mix of high inflation, an oil crisis and the collapse of an economic agreement between nations led to another bad period for the stock market. Stocks fell about 50 percent from their peak in 1973.
A History of Bear Markets
A bear market in the 1960s preceded a recession. The economy had grown robustly for much of the decade, and the Fed’s inflation interventions helped cause two market declines.
A History of Bear Markets
In the early 2000s, after the dot-com bubble burst, a period of recession lasted eight months.
A History of Bear Markets
In 2008 and 2009, the financial crisis and bear market led to the deepest U.S. recession since the end of World War II. Then came a bailout that helped lead to a bull market that lasted over a decade.
Follow our live bear market coverage.
- I Know Exactly Where This Market Is Heading (Just Kidding)
- When You’re Forced to Cash Out in a Bear Market
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Schwab agrees to pay $187 million to clients it was accused of misleading with robo-adviser.
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By Tara Siegel Bernard
Charles Schwab has agreed to pay $187 million to settle charges brought by the Securities and Exchange Commission, which accused the financial services firm of misleading investors with a recommendation to keep large sums of money in cash — ultimately dragging on their portfolio returns.
The regulator said on Monday that Schwab’s robo-adviser — an automated service that creates and manages investor portfolios — made false and misleading statements about its recommendations from March 2015 through November 2018. The firm did not charge an advisory fee for its service — and advertised it as such — but failed to disclose that its higher cash allocation would reduce investor returns by about the same amount as a separate advisory fee, the order said.
Schwab made money on the cash allocations — anywhere from 6 percent to 30 percent of an individual’s money. It collected revenue on the difference between the interest it paid to its robo-adviser customers and the interest it collected by lending that money out, according to the S.E.C.
“Schwab claimed that the amount of cash in its robo-adviser portfolios was decided by sophisticated economic algorithms meant to optimize its clients’ returns when in reality it was decided by how much money the company wanted to make,” Gurbir S. Grewal, director of the S.E.C.’s enforcement division, said in a statement.
Most robo-advisers charge a low management fee to oversee portfolios, in addition to the underlying cost of the investments. But when Schwab introduced its service in 2015, it said it was not charging such a fee. At the time, Schwab was criticized for its decision to allocate a much larger portion of the portfolios to cash than many financial advisers would typically recommend.
Schwab agreed to resolve the charges on Monday but did not admit to or deny the S.E.C.’s allegations. It also agreed to work with an independent consultant to review the company’s policies and procedures and ensure it was in compliance.
The $187 million will go to “harmed clients,” the S.E.C. said. That includes a $135 million civil penalty and about $52 million in disgorgement, or profits that Schwab must return from the alleged activities, as well as interest.
In a statement, Schwab said the firm was “proud to have built a product that allows investors to elect not to pay an advisory fee in return for allowing the firm to hold a portion of proceeds in cash.” It added that it does “not hide the fact” that it generates revenue for its services, and the company believed cash is an important part of “any sound investment strategy through different market cycles.”
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Biden highlights the strong labor market and blames Republicans for stalling efforts to aid the economy.
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By Peter Baker
WASHINGTON — President Biden defended his economic record and attacked former President Donald J. Trump on Tuesday, pointing to low unemployment and a falling budget deficit even as he acknowledged the pain of high inflation and rising gas prices.
Addressing the A.F.L.-C.I.O. at a time of growing public unease about the economy and fears of a new recession, Mr. Biden again blamed at least some of the country’s problems on Russia’s war on Ukraine and on the “ultra-MAGA Republicans” in Congress who are resisting his initiatives.
“That’s why my plan is not finished,” he said, “and the results are not finished either.”
The president has been on the defensive about the economy. With the cost of household goods climbing and stock markets falling, he used his speech to the union gathering in Philadelphia to highlight the positive elements of the economy and his success in winning money for public works projects. He also shifted responsibility for the negative elements.
He singled out Mr. Trump, declaring that the deficit shot up on the last president’s watch and jobs fell by the time he left office, without noting that much of that owed to the temporary effects of the coronavirus pandemic and bipartisan Covid relief spending.
“So many Americans lost their jobs that my predecessor became just the second president in history to leave office with fewer jobs in America than when he took office,” Mr. Biden said. “The other one, by the way, was Herbert Hoover.”
“Trump did not leave a very good situation,” he added later in the speech. No matter where in the world he goes, Mr. Biden said, international leaders “look at me and I say, ‘America is back,’ and they look at me and say, ‘For how long?’”
He continued, “This is America. We can do any damn thing we put our minds to. And guess what? We’re not going back to the false promise of trickle-down economics. We’re going forward.”
It was a friendly audience and the core of the Democratic Party base that the president needs to energize for midterm elections this fall, when Republicans appear poised to take control of at least one house of Congress.
“I promise to you, for as long as I have this job, I will be the most pro-union president in history,” he said.
