Wall Street enters a bear market as the S&P 500 dives 3.9%

NEW YORK -- Wall Street entered a bear market Monday as the S&P 500 sank 3.9%, bringing it more than 20% below the record high it set in January.

Fears about a fragile economy and stubbornly high inflation have slammed the stock market in recent days and sent Treasury yields surging to their highest levels in years. A report last week that inflation was getting worse, not better as many had hoped, sent a chill through markets that carried over into this week.

Investors expect the Federal Reserve will get more aggressive to get inflation under control, even if it risks a recession.

The Dow Jones Industrial Average was down 741 points, or 2.4%, at 30,651 as of 3:05 p.m. Eastern time, and the Nasdaq composite was 4% lower.

The center of Wall Street's focus was again on the Federal Reserve, which is scrambling to get inflation under control. Its main method is to raise interest rates in order to slow the economy, a blunt tool that risks a recession if used too aggressively.

With the Fed seemingly pinned into having to get more aggressive, prices fell for everything from bonds to bitcoin, from New York to New Zealand. The sharpest drops hit what had been big winners of the easier low-rate era, such as high-growth technology stocks and other former darlings of investors. Tesla slumped 6.8%, and Amazon dropped 4.9%. GameStop tumbled 8.3%.

"The best thing people can do is to not panic and don't sell at the bottom," said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, "and we're probably not at the bottom."

Some economists are speculating the Fed on Wednesday may raise its key rate by three-quarters of a percentage point. That's triple the usual amount and something the Fed hasn't done since 1994. Traders now see a 28% probability of such a mega-hike, up from just 3% a week ago, according to CME Group.

No one thinks the Fed will stop there, with markets bracing for a continued series of bigger-than-usual hikes. Those would come on top of some discouraging signals about the economy and corporate profits, including a record-low preliminary reading on consumer sentiment soured by high gasoline prices.

The economy is still holding up overall, but the danger is that the job market and other factors are so hot that they will feed into higher inflation. That's why the Fed is in the midst of a whiplash pivot away from the record-low interest rates it engineered earlier in the pandemic, which propped up stocks and other investments amid hopes of juicing the economy.

Wall Street's sobering realization that inflation is accelerating, not peaking, is also sending U.S. bond yields to their highest levels in more than a decade. The two-year Treasury yield shot to 3.27% from 3.06% late Friday after touching its highest level since 2007, according to Tradeweb.

The 10-year yield jumped to 3.37% from 3.15%, and the higher level will make mortgages and many other kinds of loans more expensive. It touched its highest level since 2011.

The higher yields mean prices are tumbling for bonds, a relatively rare occurrence for them in recent decades. They're also a particularly painful hit for older and more conservative investors who depend on them as the safer parts of their nest eggs.

The gap between the two-year and 10-year yields has also narrowed, a signal of weakening optimism about the economy. If the two-year yield tops the 10-year, some investors see it as a sign of a looming recession.

Monday's pain for markets was worldwide as investors braced for more aggressive moves from a coterie of central banks.

In Asia, indexes fell at least 3% in Seoul, Tokyo and Hong Kong as worries also rose about business-slowing, anti-COVID restrictions in China. In Europe, Germany's DAX lost 2.4%.

Some of the biggest hits came for cryptocurrencies, which soared early in the pandemic as ultralow rates encouraged some investors to pile into the riskiest investments. Bitcoin tumbled more than 16% from a day earlier and dropped to $23,278, according to Coindesk. It's back to where it was in late 2020 and down from a peak of $68,990 late last year.

On Wall Street, the S&P 500 was more than 21% below its record set early this year. If it finishes the day more than 20% below that high, it would enter what investors call a bear market.

Bears hibernate, so bears represent a market that's retreating, said Sam Stovall, chief investment strategist at CFRA. In contrast, Wall Street's nickname for a surging stock market is a bull market, because bulls charge, Stovall said.

The last bear market wasn't long ago, but it was an unusually short one that lasted only about a month in early 2020. The S&P 500 got close to a bear market last month, but it didn't finish a day below the 20% threshold.

Michael Wilson, a strategist at Morgan Stanley who's been among Wall Street's more pessimistic voices, is sticking with his view that the S&P 500 could fall further to 3,400 even if the U.S. economy avoids a recession over the next year.

That would mark another nearly 10% drop from the current level, and Wilson said it reflects his view that Wall Street's earnings forecasts are still too optimistic, among other things.

With soaring price tags souring sentiment for shoppers, even higher-income ones, Wilson said in a report that "the next shoe to drop is a discounting cycle" as companies try to clear out built-up inventories.

Such moves would cut into their profitability, and a stock's price moves up and down largely on two things: how much cash a company generates and how much an investor will pay for it.