A tumultuous week on Wall Street, which began with stocks plunging into a bear market for the second time during the pandemic, ended with a small gain on Friday. That was little comfort after a brutal period for investors, who have seen the value of their portfolios and retirement funds lurch downward.
The S&P 500 rose 0.2 percent on Friday but finished the week with a loss of 5.8 percent, its 10th decline in the past 11 weeks and its worst weekly performance since March 2020 — when stocks crashed as the coronavirus spread around the world and investors feared for the global economy.
This time the selling was fueled by persistently high inflation, which erodes people’s spending power and puts a dent in corporate profits, and the growing sense that the Federal Reserve’s efforts to beat it back with higher interest rates will choke growth. By making it more costly to borrow to buy a house, invest in a business or do just about anything else with debt, the Fed can cool demand and slow price gains, but if it goes too far it can tip the economy into a recession.
Wall Street has been on edge for months, but the mood darkened considerably after the government released its latest reading of the Consumer Price Index last Friday. It showed inflation accelerating again in May, as prices rose at an 8.6 percent annual pace. Some investors had begun to expect inflation to slow down, and the report jolted them out of that view.
By Monday, the panic about the economy was on full display, and stocks plunged nearly 4 percent, a drop fomented in part by the news that the Fed was considering making an unusually large increase in rates when it met later in the week. Monday’s drop left the S&P 500 down more than 20 percent from its January peak, and in its seventh bear market in the past 50 years.
“It’s all part of one story, which is inflation,” said Aswath Damodaran, a professor of finance at New York University. “Until we get a handle on where we’re going to end up in inflation, you’re going to see up days and down days which are big.”
On Wednesday, when the central bank did raise its policy rate by 0.75 percentage points, the largest one-off increase since 1994, stocks climbed. Investors seemed to take solace in the Fed chair Jerome H. Powell’s assurance that policymakers were “not trying to induce a recession.”
The feeling didn’t last. Another steep decline on Thursday, of more than 3 percent, reflected worries that a more aggressive Fed could, in fact, induce a recession.
Analysts say the turmoil isn’t likely to end until investors see signs that inflation has begun to peak — or until the Fed begins to signal an end to its campaign to combat rising prices. That’s probably a distant outcome.
On Friday, Mr. Powell said he and his colleagues were “acutely focused on returning inflation to our 2 percent objective,” citing a level that is far below current inflation rates.
Investors — who have veered from relief that policymakers are taking aggressive actions to rein in inflation to fear about the effect those actions may have on economic growth — are betting the swings are here to stay. One measure of this is the VIX volatility index, commonly called the “fear index” because it tracks investors’ demand for a type of financial instrument that offers protection against market drops. It has more than doubled in the past year.
The selling in stocks has been wide ranging. Of 11 company sectors in the S&P 500, 10 are in the red for the year. Only energy companies, as a group, are higher. Their gains have come as the price of oil and gas has skyrocketed, first as people returned to many pre-Covid activities and then as Russian energy became untouchable after its invasion of Ukraine.
Stocks are perhaps the most widely understood measure of the financial mood, but other markets were plenty shaken, too.
Cryptocurrencies, which some believe should act as havens in times of inflation and turmoil, have had a torrid time. Bitcoin lost nearly 30 percent of its value this week alone, falling to its lowest level since 2020. Some of the crypto industry’s biggest players, like Coinbase, Gemini and Crypto.com, announced layoffs. Celsius, an experimental crypto bank, abruptly halted withdrawals.
With cryptocurrencies, and with stocks, it’s possible investors could lose a lot more money before things get better.
“There’s a lot more pain left,” Mr. Damodaran said.
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