NEW YORK — U.S. stocks drifted lower Monday to start what could be a quiet stretch following their best week since March.
The S&P 500 lost 8.58 points, or 0.2%, to 4,273.79. The Dow Jones Industrial Average fell 199.90, or 0.6%, to 33,562.86, while the Nasdaq composite slipped 11.34, or 0.1%, to 13,229.43.
A display shows market data on the floor at the New York Stock Exchange in New York on June 2.
The majority of stocks on Wall Street sank after a report showed growth fell short of economists’ forecasts for businesses in the construction, accommodation and other U.S. services industries last month. It was still a fifth straight month of expansion, though.
It’s the latest mixed reading for a U.S. economy that has defied forecasts for a recession but has begun to slow under the weight of higher interest rates.
“There’s this muddle-through environment that the market is starting to work through,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial.
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Monday’s dip came after a weekslong rally carried Wall Street to its highest level since August. That was largely because a resilient job market has forced recession-callers to keep pushing out predictions for a downturn by another few months. Still, pressure remains on the economy from the squeeze of still-high inflation, interest rates and cracks in the U.S. banking system.
“The market is starting to build a degree of optimism that I think is warranted,” Saglimbene said. “Whether it comes to fruition remains to be seen.”
After helping to lead the market higher early in the day, a drop for heavyweight Apple helped drag the S&P 500 to its modest loss in the afternoon. It fell 0.8% after unveiling a long-rumored headset that will place its users between the virtual and real world. It will cost $3,500 when it’s released early next year.
In the oil market, crude gained after Saudi Arabia said it would cut back production in hopes of boosting its price. A barrel of U.S. crude rose 0.6% to $72.15, and a barrel of Brent crude, which is the international standard, climbed 0.8% to $76.71.
Both were close to $120 a year ago, and their prices have fallen on worries that a strapped global economy would burn less fuel.
Elsewhere, Wall Street was relatively quiet. This upcoming week is light on earnings reports and top-tier economic data. That leaves few clues for the dominant question hanging over the market: Which will come first, the economy falling into a recession or inflation easing enough for the Federal Reserve to cut interest rates?
That’s why much attention is on next week, when the government will release the latest monthly updates on inflation at the consumer and wholesale levels. It’s also when the Fed will meet next on interest rate policy. Traders are largely betting that it will stand pat on rates, which would mark the first meeting where it hasn’t hiked in more than a year.
The bet on Wall Street, though, is that it could resume hiking rates in July. The reason for such a pause would be to allow the Fed time to assess how its frenetic set of rate hikes over the last year have affected the economy.
The goal of high rates is to lower inflation by slowing the entire economy and dragging down prices for stocks, bonds and other investments. With rates at their highest level since 2007, several high-profile U.S. bank failures since March have already shaken the market, while the manufacturing industry has been contracting for months.
Last week, though, data showed that U.S. employers unexpectedly accelerated their hiring in May, while increases in workers’ wages slowed to keep some pressure off inflation. That helped bring Wall Street to the edge of what’s called a “bull market.”
If the S&P 500 rises 0.4% more and finishes a day above 4,292.44, it will be more than 20% above where it was in mid-October. That would mean Wall Street’s main measure of health has transformed from its frigid “bear market,” when it fell more than 20% over nine months, into a powerful bull.
In the bond market, the yield on the 10-year Treasury fell to 3.68% from 3.70% late Friday. It helps set rates for mortgages and other loans that shape the economy’s strength.
The two-year Treasury, which moves more on expectations for the Fed, dropped to 4.45% from 4.51%. It had been higher earlier in the morning, before the weaker-than-expected report on the U.S. services industries thudded onto Wall Street.
In stock markets abroad, indexes were mostly lower in Europe. Japan’s Nikkei 225 jumped 2.2%, while gains in other Asian markets were more modest.
4 investments to avoid during a recession
4 investments to avoid during a recession
Increasing interest rates, high inflation and a regional banking crisis have many people convinced a recession is on the way.
The Federal Reserve raised the federal funds rate to its highest level since 2007 in May, marking the tenth consecutive rate hike since March 2022. U.S. inflation hit a 40-year high in 2022 amid soaring demand, an already-strained global supply chain and Russia’s invasion of Ukraine.
Additionally, the S&P 500 remains well off its Jan. 3, 2022 high, adding to the sentiment that a recession is likely.
In the event a recession does hit, Bankrate compiled a list of investments you may want to consider avoiding. If you have questions on your financial portfolio, consider speaking with a financial advisor.
What investments should you avoid during a recession?
Recessions can be tricky to predict, and even trickier to navigate. Investments you might traditionally think of as safe might in fact expose you to more risk depending on the economic environment.
High-yield bonds
Your first instinct might be to let go of all your stocks and move into bonds, but high-yield bonds can be particularly risky during a recession.
High-yield bonds, with credit ratings below investment grade, are riskier than government debt securities, and are highly susceptible to market downturns. The issuing companies are often smaller, indebted and of overall lower quality, and in times of market uncertainty can be more likely to run into trouble.
Stocks of highly-leveraged companies
Companies carrying high levels of debt on their balance sheets should be avoided during a recession. The price of a highly indebted company is more likely to fall during a recession. If a company struggles to pay back its debts due to decreased demand and an overall economic slowdown, its stock price can fall quickly and the company may even fall into bankruptcy.
Although indebted companies can tumble in a recession and present investment opportunities later on, a defensive investor should stay away while the company faces clear business challenges that must be overcome.
Consumer discretionary companies
Consumer discretionary stocks are popular during boom times, but their goods and services fall outside of everyday essentials like utilities and healthcare. Well-known consumer discretionary companies include Tesla and travel companies such as cruise lines or airlines.
This sector can be particularly susceptible to recessionary pressures, as the economy slows and people start spending less. Consumer discretionary companies move more dramatically with consumer sentiment and economic cycles, which can worsen in times of financial uncertainty.
Other speculative assets
Speculative assets are high-risk, high-reward investments such as penny stocks or stocks of companies with little to no earnings. Penny stocks are small companies whose stocks trade for very low prices. They’re not typically listed on major exchanges, and often do not provide financial information, giving investors little transparency and making them risky investments.
In recent years, many companies have used cheap debt to finance their operations, hoping to show revenue growth and worry about earnings later. But as the economy slows, revenue growth is harder to come by and with higher interest rates, investors want to see more in the way of earnings today. These companies can be hit by both a business downturn and a reduced valuation because of higher rates.
Many consider cryptocurrencies like Bitcoin to also be speculative. Cryptocurrencies don’t have intrinsic value because they don’t generate anything for their owners, such as dividends or earnings. Cryptocurrencies experience volatile price swings, and may see significant losses during a recession.
What investments should investors hold on to?
Recessions do not mean that you should pull out of all your investments. A decline in stocks can mean opportunities for investors to buy valuable long-term investments at discounted prices. Distinguishing between what you should let go of and what you should stay invested in is a crucial first step.
“Generally, investors should consider balancing capital preservation in portfolios in the short-term with staying invested for longer-term opportunities. In this environment, how you get exposure is of paramount importance. We would recommend investors focus on higher-quality investments and avoid more speculative areas of the market,” says Sid Vaidya, U.S. chief investment strategist at TD Wealth.
This means staying focused on companies with resilient balance sheets, high-quality fixed income like Treasuries and mortgage-backed securities and credit instruments like investment-grade bonds, Vaidya adds.
Treasuries and mortgage-backed securities are higher-quality securities that offer consistent income and stability.
Bottom line
It’s important to stay invested during a recession and not simply empty out your positions into cash – but the quality of your investments is crucial. Avoiding highly indebted companies, high-yield bonds and speculative investments will be important during a recession to ensure your portfolio is not exposed to unnecessary risk. Instead, it’s better to focus on high-quality government securities, investment-grade bonds and companies with sound balance sheets.
Georgina Tzanetos contributed to a previous version of this article
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
This story was produced by Bankrate and reviewed and distributed by Stacker Media.
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