The US stock market continued to decline Monday morning as investors took in new economic data from China that showed slower production performance than analysts predicted. The Nasdaq fell roughly half a percentage point Monday morning amid the chaos with large-cap tech companies like Tesla and Apple. The S&P 500, likewise, dipped another 0.3% this morning, with the index falling over 16% from its recent high in January 2022.
China’s economic outlook is flagging in the face of mandatory lockdowns. Chinese retail sales slowed by 11.1% annually in April. That’s the worst slowdown in China’s economy since March 2020, which has many investors worried about a potential recession in the country. Meanwhile, US customers are still staring down rampant inflation and sky-high gas prices. US Crude oil erased losses from last week and is now trading higher than expected. This high trade demand has brought a renewed surge in gas prices in the US, with many customers now facing down prices well of 4$ per gallon.
Investors are scrambling to get out of risky assets as inflation continues running near a four-decade high. The Federal Reserve keeps weighing its options for curtailing the runaway US dollar. Market experts say the volatility in the market will stay high until the Fed’s inflation plan starts working. In the meantime, the potential for ever-growing interest rates and a slowing economy could push retail investors out of stocks and into Treasury bonds.
What’s Next for the Stock Market?
Some experts say there are two major factors weighing on the stock market. The first is the Fed’s ongoing battle against inflation. “We think the turning point is really an open question at this juncture. We’re probably between what we would call two repricings: Repricing one is the Federal Reserve-induced repricing,” says U.S. Bank Asset Management chief investment officer Eric Freedman. Statements from Fed Chair Jerome Powell have indicated that the US’s central bank isn’t considering any 75 basis-point rate hikes right now, but that could change if inflation stays stubbornly high.
“When the Fed says they’re going to raise rates, every other asset class has to move down in price and up in yield,” Freedman continues. “So we’re really in the middle of that. There could be a turning point there, depending on what the Fed decides to do in terms of communications.”
The second factor pressuring stocks right now is a bit more technical, Freedman explains.
“But the next repricing — again, the risk of potential more downside — is if we start to see higher commodity costs as well as higher borrowing costs structurally trickle into the real economy and stay there for some time,” he noted. “So do think that we’re in a deeply oversold condition … but we would still be a bit on the cautious side right now thinking that there’s more potential downside ahead.”
Volatility due to Russia
It’s also impossible to talk about the stock market right now without mentioning Russia’s invasion of Ukraine. Russia violated international law by aggressively invading its neighbor, Ukraine, and sparking a global wave of uncertainty that has upended markets in Europe and abroad. Russia’s gas exports are critical to the European economy, so any disruption in Eastern Europe has ramifications for the rest of the continent.
The US has responded swiftly to Russia’s war effort by levying harsh economic sanctions on Moscow. This policy of “economic warfare” has hobbled Russia’s economy and slowed the country’s ability to fund its military. It’s also brought about a wave of US-based companies abandoning Russia to avoid potential backlash from the Kremlin.
In March, fast-food chain McDonald’s became the first US company to cease operations in Russia. This sudden move sparked similar action from other American franchises, like Starbucks and Coca-Cola. Now, McDonald’s is pulling out of Russia altogether and selling its franchise stores to Russian investors.
McDonald’s Getting Out of Russia
McDonald’s announced on Monday that it will be leaving Russia altogether due to its invasion of Ukraine. “Some might argue that providing access to food and continuing to employ tens of thousands of ordinary citizens is surely the right thing to do,” McDonald’s Chief Executive Chris Kempczinski explained to the company’s employees. “But it is impossible to ignore the humanitarian crisis caused by the war in Ukraine.”
Some analysts expect other companies to follow suit once again, leaving Russia behind as the country continues to wage war in Ukraine. “I would not be surprised to see other companies follow McDonald’s lead of exiting the market,” says Brian Yarbrough, an analyst for Edward Jones.
Ukraine’s military has defied global expectations and pushed Russian forces away from key strategic cities like Kyiv. The conflict has entered a stalemate, with Russia unwilling to admit defeat despite being unable to push deeper into Ukraine. It’s anyone’s guess how the invasion could become resolved now, but neither side is willing to concede right now.