In the US they prepare for the increase in interest rates 2:32
(CNN Business) --
If you're nervous about the stock market, you have good reason to be: Central banks around the world are losing the battle against inflation, and their response could plunge the global economy into recession.
Let's take a step back: last week, the Federal Reserve (Fed) raised interest rates by three-quarters of a percentage point (0.75%), their biggest increase since 1994. The Bank of England also raised its target interest rate for the fifth time since December.
And Switzerland's central bank raised rates for the first time in 15 years.
But they are not finished.
The Bank of England has admitted that inflation will approach 11% in the fall, and the Fed has just increased its 2022 inflation expectations by one percentage point. Although Fed Chairman Jerome Powell said last week there is still a chance for the US economy to avoid recession, he admitted that Russia's war in Ukraine, the ongoing pandemic, and the supply chain and energy crisis "increased the degree of difficulty and created great challenges ... so just we do not know".
By withdrawing stimulus and putting the monetary policy engine in full reverse, the Fed and other central banks have rattled investors.
The US stock market entered a bear market, and last week was Wall Street's worst since March 2020: the S&P 500 tumbled almost 6%, and the Dow tumbled 1,504 points, or about 5%.
US stocks have fallen 23% since hitting their all-time high on January 3.
However, they could have much more room to fall, especially if efforts to rein in runaway prices push the economy into recession.
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"The Fed may be willing to push the economy into a recession to control inflation," Anthony Saglimbene, global markets strategist at Ameriprise, told me.
"I think that was probably in the back of investors' minds, but now it's front and center. Stocks are going to have a rough time until they figure out what that end point is for the Fed," he added.
Biden considers lifting tariffs imposed during the Trump administration to curb inflation.
This is how the measure could affect you
Recessions have not been kind to investors.
Bear markets during recessions have historically been longer and deeper than bear markets that weren't associated with economic downturns, says Sam Stovall, chief investment strategist at CFRA Research.
Since World War II, stocks have fallen 28% in non-recession bear markets and 36% in recession bear markets.
Recessions keep people from spending, which hurts business results.
Although some Wall Street analysts have included a recession in their earnings forecasts, stocks may still be a bit pricey if history is any guide.
Based on historical price-earnings ratios during a recession, Stovall predicts that the S&P 500 could bottom around 3,215 points, which would be about a 33% decline from high to low.
Even analysts who don't expect such a drastic decline believe stocks have room to fall.
Keith Lerner, chief market strategist at Truist Advisory Services, believes the S&P 500 will bottom around 3,400 points, another 7.5% decline from Friday's close.
"This would make an incredibly brutal market feel that much worse," Lerner said.
"And of course the markets could outperform."
One factor that complicates the situation: central banks cannot rely on the tools they used in past recessions.
Traditionally, the Fed and other central banks have cut rates and created money to buy government debt to stimulate the economy.
But even if inflation moderates in a recession, there are many factors - commodity prices, fuel costs and supply chain problems - that are beyond your control.
Lowering rates could worsen inflation, undoing any price moderation we might get from an economic downturn.
The good news, if you can call it that, is that most economists forecasting a recession are expecting a much smaller downturn than the crash of the early 1980s. And stocks may have been hit so badly late in the year that Any signs of moderating inflation or hints that the Fed may be easing rate hikes could boost the market again.
“One of the best things for stocks right now is that given negative sentiment, a little bit of good news could go a long way,” said Truist’s Lerner, who notes that bear markets tend to be much shorter than bear markets. bull markets, and stocks typically bottom several months before a recession ends.
Another reason for optimism: In the year following a recession, the stock market returns 40% on average to investors.
Tips to protect your money 1:50
China buys a lot of Russian oil
Despite Western efforts to punish the Kremlin for Russia's invasion of Ukraine, it has been unable to stop President Vladimir Putin from selling off the country's oil and gas.
The taps have remained open and money continues to flow to Moscow for a variety of reasons: lack of alternative supplies, rising prices and interested buyers in other parts of the world.
The result: The Russian economy, though in a deep recession, has largely avoided the crisis that many in the West expected.
This week, data from China's General Administration of Customs illustrated just how difficult it has become to cut Russia's main lifeline.
The administration reported that China imported 55% more Russian oil last month than in May 2021, and that Russia unseated Saudi Arabia as China's top oil supplier.
Oil prices could rise further globally
The Saudis had been China's top oil exporter for 19 consecutive months.
But Russian crude took a sharp price cut as the country tried to find willing buyers, with China apparently unable to say no to bargain prices at a time of historically high energy costs.
India also increased its imports of Russian oil.
The European Union will impose an embargo on 90% of Russian oil, but it also has another card up its sleeve to limit the Kremlin's options: a ban on insuring ships carrying Russian oil, which would make it difficult for Moscow to divert hundreds of thousands of barrels per day to India and China.
The European Union announced that companies in the bloc will not be able to "insure or finance the transport" of Russian oil to third countries after a six-month transition period, reports my colleague Julia Horowitz.
That could make it harder for Russia to find ships willing to load its crude.
It may not be that simple: the EU rule would likely drive up oil prices even higher, something politically vulnerable Western politicians, including US President Joe Biden, do not like very much.
Russia has also benefited from rising crude prices.
If the insurance ban drives prices up even higher, that could partially offset the pain the new rule could inflict.
Libyan oil struggles
As if the world needed any more bad news on oil prices, Libya's oil industry is in disarray, pumping less oil than it was a year ago, even as the world struggles to find new sources of energy.
Conflict in the country has led to unreliable government reporting on its oil production.
My colleague Nadeen Ebrahim reports that warring parties have used oil as leverage in their power struggle.
Rival governments took control of the oil facilities and have closed them on several occasions.
That is why the Libyan Oil Ministry said last week that production had slowed to a near halt in June, at 100,000 barrels per day (bpd), down from 1.2 million bpd last year.
This week, Oil Minister Mohamed Oun told CNN that some fields had come back online and production had risen to 800,000 bpd.
However, production remains lower than last year and shows that the Libyan oil sector remains in turmoil.
No one is sure who is in charge of the country's crude supply.
"There are certain parties that try to take advantage by misrepresenting oil production figures," said US Ambassador to Libya Richard Norland, calling last week's Oil Ministry figures "inaccurate."
"Actual production is significantly higher," he said.
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