Investors are expecting that the Fed will increase interest rates by 75 basis points at its meeting on June 15, as concerns grow that central banks would be unable to control consumer prices without triggering a recession.
Losses in the broader market were sharp, with the S&P 500 losing more than 21% year-to-date (YTD), wiping out more than $8 trillion in market value this year alone.
Crypto isn’t faring much better
Similarly, cryptocurrencies continued to fall further, with Bitcoin falling below $21,000, a drop of more than 30% in just one week, indicating that investors are selling their most speculative holdings.
There appears to be some correlation between the cryptocurrency market and the stock market, as Bitcoin appears to have tracked the performance of the Nasdaq and S&P 500 indices over the last 30 days. Nonetheless, the Fed meeting will almost certainly determine the direction of this trend and its potential decoupling.
What happens next for markets?
Some indicators, such as the Cboe Volatility Index, also known as the VIX, may alert market participants if more pain is on the way. The VIX is commonly regarded as a ‘fear gauge,’ measuring market volatility as expressed by option prices.
The VIX reached 85 levels during the Covid downturn, compared to 37 levels on average during market bottoms. During the market sell-off on Monday, June 13, the VIX reached 35.05. According to Cboe data, the volume of put options reached 2.03 million on Monday, the highest level since February 2020.
In comparison, the American Association of Individual Investors sentiment survey indicates that investor sentiment is gradually declining, which might exacerbate market turmoil if retail investors begin to exit the market.
When a stock appears oversold, it is likely that others will begin to invest in it. However, deciding when to enter a bear market may be one of the most difficult decisions an investor must make.