Welcome to the year of the bear

By Allison Morrow, CNN Business

Editor’s Note: This story is part of CNN Business’ Nightcap newsletter. To get it in your inbox, sign up for free, here.

Hello from the mountains of northwest Pennsylvania, where I’ve spent much of the weekend staring into the woods in the hopes of spotting my local bear. True story: she’s out there, according to witnesses. But for whatever reason, I can’t seem to time my visits right. I’ve been grumbling about it for months.

In a fun cosmic twist, Monday arrived with a big bear of another sort.

Here’s the deal: We’re officially in a bear market, which happens when stocks close down 20% or more from their most recent high.

• The S&P 500, the broadest measure of Wall Street, ended the day down 3.9%. It’s down more than 21% from its high reached in early January.
• That means the bull run that started on March 23, 2020, has come to an end. (But the bear market technically began on January 3 of this year, when the index hit its all-time high.
• The Dow fell 875 points, or 2.8%.
• The Nasdaq, which slipped into bear territory in March, fell 4.7%.
• Bitcoin, ethereum and other cryptos joined the meltdown (more on that in a minute).

Why are stocks falling?

In short: Inflation, and the Federal Reserve’s efforts to tame it.

Investors’ nerves were already fried, and then Friday happened. A closely watched inflation report showed prices rising 8.6% in May, the fastest rate since 1981. Inflation isn’t a new problem, but that reading dashed all hopes that it’s slowing down.

To investors, the inflation reading signals that the Fed is going to have to get much more aggressive with interest rate hikes, which Wall Street hates. Higher interest rates make it more expensive to borrow money, and that tends to sap earnings and stock prices.

What will the Fed do?

We’ll find out Wednesday at the end of the central bank’s two-day policy meeting.

It was just a month ago that stocks rallied after Fed Chair and Verified Silver Fox Jerome Powell said that the central bank was not “actively considering” raising interest rates by three-quarters of a percentage point. But that doesn’t mean it’s off the table now.

A three-quarter-point rate hike isn’t unheard of, but it’s exceedingly rare, my colleague Paul R. La Monica writes. The last time the Fed hiked rates by 75 basis points was in the Alan Greenspan era, in November of 1994. (Remember ’94? Boyz II Men dominated the radio, Disney released The Lion King, and the world had not yet become enamored with the ill-advised Rachel Cut).

For now, most analysts expect a half-point hike. But expectations for a three-quarter-point increase have gone up from just 3% a week ago to 40% now, according to CME’s FedWatch tracker.

Bottom line

The inflation situation sucks, and the Fed basically has only two tools — interest rates and reducing its massive Treasury purchases — to try to fix it. But the Fed has no idea how much tightening is the right amount, and we won’t know if this tightening was too much or too little until long after we’ve entered (or avoided) a recession.

RELATED: When you encounter a bear, don’t panic. My colleague Jeanne Sahadi explains how you can protect your money.

NUMBER OF THE DAY

23,000

Bitcoin, the world’s largest cryptocurrency, has lost more than 20% of its value since Friday, briefly tumbling below $23,000, its lowest level in 18 months. Other cryptos also sold off as investors fled risky assets like digital currencies and tech stocks.

The meltdown prompted two of the world’s biggest cryptocurrency platforms to temporarily suspend trading.

COMFORT STOCKS

Savvy investors know you can always find winners on Wall Street, even when things look as bad as they did Monday. The safe havens du jour? Coca-Cola, peanut butter, and Kleenex. Not a bad plan for a night in, tbh.

Here’s the deal: Pretty much everything was down on Monday, as a selloff that began Friday continued.

So traders flocked to consumer products companies that sell essentials. The top performers in the S&P 500 included Coca-Cola and Smucker, my colleague Paul R. La Monica writes.

Also up slightly: Kleenex maker Kimberly-Clark, McDonald’s, Hormel Foods and Kroger. (Shares of Pepsi, Tyson Foods, Kellogg and Hershey all dipped much less than the broader market.)

The biggest losers included shares in the travel and leisure sectors — think casino owners, cruise lines and airlines.

In short, traders are doing what humans do when things get tough: Stock up on comfort foods and toilet paper.

Coke, one of Warren Buffett’s favorites, deserves a bit of special attention here. Its shares are up 3.6% this year — a bonanza compared with the broader market (see stock bloodbath above.)

Also Monday, Coke enjoyed a bit of added buzz when it announced a partnership with Brown-Forman to make a new Jack and Coke canned cocktail.

Canned cocktails are the new hard seltzer, after all. It’s honestly kind of unbelievable that a Jack and Coke can hasn’t happened till now. Coke has also rolled out Topo Chico Hard Seltzer and Simply Spiked Lemonade. And we’ve been promised a Fresca cocktail sometime this year — watch this space for what will likely be an unhinged review from this longtime Fresca stan.

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