The Dow — a stock market index that tracks 30 large public companies trading on American exchanges — reached 30,000 for the first time at the end of 2020 under former President Donald Trump. When President Joe Biden entered office on January 20, 2021, the Dow closed at slightly under 31,000 amid the rebound from COVID and the lockdown-induced recession.
After steadily increasing to nearly 37,000 through 2021, the Dow has since plummeted due to several economic headaches — including record inflation rates, persistent supply chain bottlenecks, and the Russian invasion of Ukraine. On Thursday afternoon, the index sank below 29,900 — reflecting a roughly 19% plummet from its peak in early 2022.
Most recently, the Consumer Price Index (CPI) increased 8.6% year-over-year as of May, surpassing economists’ expectations. The Producer Price Index (PPI), which monitors inflation for wholesalers, increased 10.8% over the same period.
The Thursday selloff was induced by the Federal Reserve announcing that it would hike interest rates by 0.75% in the boldest monetary policy action since 1994. The central bank already increased rates by 0.5% in May — the largest such increase since 2000 — after a 0.25% rate hike from near-zero levels in March.
Rate hikes are meant to discourage further price level increases and signal to investors that central bankers are serious about battling inflation, but they carry the side effect of increasing borrowing costs for businesses and consumers — thereby dampening economic activity.
“Overall economic activity appears to have picked up after edging down in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low,” the Federal Open Market Committee, which handles the Federal Reserve’s policy interventions, said in a statement. “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
The yield curve — which tracks the relationship between bond maturity and expected interest rates — inverted earlier this week in a sign that the economy is bound for a recession. Normally, a bond with a more distant expiration will have a better interest rate — but with an inverted yield curve, short-term interest rates are higher than long-term ones, reflecting a looming rate increase in the near future.
Overall, the United States economy shrank at an annualized 1.5% pace during the first quarter of 2022, representing the most severe drop since output plummeted by 31.2% in the second quarter of 2020. The U.S. Bureau of Economic Analysis generally defines a recession as two consecutive quarters of negative growth.
Multiple polls, therefore, show business leaders predicting a contraction. In the National Association of Manufacturers’ most recent Manufacturers’ Outlook Survey, over 59% of executives in the sector said inflationary pressures “make a recession more likely in the next 12 months.” More than 90% of respondents identified higher raw material costs as one of their “primary business challenges” in the second quarter.
Likewise, CNBC’s most recent CFO Council Survey indicates that financial executives reflected a pessimistic attitude about economic futures. Most respondents — 68% — believe a recession will strike in the first half of 2023.