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High inflation anxiety drives stocks into bear market territory

As inflation heats up and gas stations at intersections across the country post prices of $5 a gallon and higher, Wall Street wonders: Is the next recession around the corner? 

Fear built into a frenzy Monday. The Dow Jones Industrial Average tumbled by 876.05 points or 2.79% Monday to close at 30,516.74. 

Investors have witnessed a miserable meltdown over the past week. The Dow has lost 2,663.4 points or 8% since closing at 33,180.14 on June 7. 

No one really knows whether the Federal Reserve will be able to cool inflation down — or if any economic slowdown will be long lasting or temporary. 

We know for certain that higher interest rates — significantly higher — are down the road. The Federal Reserve is expected to drive up short-term rates by at least a half of a percentage point Wednesday. More rate hikes are expected later this year.

Will the Fed be more aggressive? 

Buzz has begun building, though, that the Fed could shock markets with a larger-than-expected 0.75-percentage-point interest rate increase Wednesday.

We received yet another sign that inflation isn't under control when the Labor Department reported Friday that the consumer price index was up 8.6% for the 12 months through May. That's the highest level since December 1981. 

The Fed starts a two-day policy meeting Tuesday, one that will now have much more debate and ultimately could end with a 75-basis-point rate hike, according to an online scoop Monday afternoon by the Wall Street Journal. 

The year on Wall Street has been touch and go in 2022. The Dow closed at an all-time high of 36,799.65 on Jan. 4.

But the market has turned into a rickety amusement park ride of stomach quaking 1,000-point drops and losses after Russia invaded Ukraine in late February and inflationary pressures kept building.

The Dow is down 6,282.91 points from its all-time high — falling by 17%. The Dow isn't officially in a bear market but the broader Standard & Poor's 500 index is down more than 20% from its all-time high set in January, which puts the S&P 500 in an official bear market.

Auto stocks among casualties

Higher interest rates, higher gas prices and higher anxiety are creating casualties all over Wall Street, including among auto stocks.  

General Motors fell $2.73 a share or 7.8% to close Monday at $32.28 a share. GM closed below its $33 initial offering price set after it moved out of its 2009 bankruptcy. 

GM had closed at $65.74 a share on Jan. 4 but the market meltdown this year drove GM down nearly 51% Monday from that January close. 

GM Chief Executive Mary Barra said at the automaker's shareholder meeting Monday that the automaker is "selling every truck we can build," even as gas prices break records.  

Ford fell by 94 cents a share or 7.37% to close at $11.81 Monday. In trading Monday, Ford touched at its 52-week low of $11.74.

Ford's close on Monday was 53% below its close of $25.19 on Jan. 14. 

Chrysler parent Stellantis NV fell by 64 cents or 4.69% to close at $13 a share. Stellantis had closed at $21.76 on Jan. 14 and as of Monday's close was down about 40% since that high. 

Morningstar auto analyst David Whiston said the fear of a recession has been building along with worries inflation and high prices will stifle the ability of consumers to spend.

Higher interest rates trigger affordability issues, he said, for budget-sensitive consumers who are already looking at very expensive vehicles due to the microchip shortage.

"The more of one’s monthly payment that is going to interest the less that goes to principal, which can eventually mean someone opts out of a SUV and goes to a crossover or sedan," Whiston said. Such a switch would hurt the profit mix for automakers. 

Borrowers will continue  to face higher interest rates in 2022 as the Fed raises short-term rates.

The average five-year new car loan rate is 4.53%, according to But it is expected to hit 5.75% by early 2023. 

Garrett Nelson, a senior equity research analyst covering the automotive sector at the research firm CFRA, said U.S. new car and truck sales already started to roll over as consumers have begun pulling back on their discretionary spending.

Sales of new cars and light trucks fell to 12.7 million in May for a seasonally adjusted annual rate — down nearly 25% from a year ago. That was down from a rate of 14.5 million new light vehicle sales in April. Analysts are blaming a tight supply from the semiconductor shortage, supply chain issues and record low incentives for cutting into the spring selling season's gains. 

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"Prices remain near a record high though because of cost-push inflation and inventories that are still near record lows," Nelson said. 

New car and truck sales are highly correlated, he said, with consumer confidence. 

"And we just got the weakest monthly consumer confidence number on record on Friday," Nelson told the Detroit Free Press. The data goes back to 1952. 

Significantly higher gasoline prices — with some people now fretting that it's costing them $10 to $15 a day just for gas to drive to work and back — will only cut further into what people can afford to spend each month on a car payment. 

Sam Stovall, chief investment strategist for U.S. equities at CFRA Research in New York, said automakers will suffer squeezes on their profit margins as consumers pull back from buying larger, more expensive SUVs and trucks now that rates and gas prices are high. 

"The risk of recession is rising," Stovall said.

On the plus side, though, economists say that consumers, while pessimistic, have far more savings overall on the sidelines that can shore up some purchases. Much may depend on how soon the war in Ukraine is resolved, how soon some supply chain disruptions improve and how well the Fed's actions will cool down inflation. 

Not all of the slowdown in autos can be attributed to higher interest rates — or fears of a recession. The production disruptions relating to semiconductor issues remain. 

"There’s still tons of pent-up demand because of the chip shortage," Morningstar's Whiston said.

"Autos have been at severe recession levels most of the time since last fall due to poor supply caused by the chip shortage."

Bill Adams, chief economist for Comerica Bank, told the Free Press in a phone interview that many potential new car and truck buyers have above-average savings and household wealth that's accumulated over the last two years.

Auto sales, he said, can continue to rise in spite of the headwind from higher interest rates.

"Carmakers are finding ways to manage the chip shortage so that is becoming less of a problem for production, though inventories are very low on dealer lots," Adams said.

He said car sales are likely to continue to recover this year and next year. 

Many consumers who might have bought a new or used car in the past two years delayed those purchases as inventories remained tight and the vehicle they wanted was either priced at a premium or not available. 

"The deferred buyer is going to be still buying cars over the next two years even though demand for other durable consumer goods is going to soften," Adams said. 

And some, he said, may consider buying an electric vehicle now that gas prices are so high, which can help drive some new car and truck sales. 

Even so, investors and consumers must brace themselves for more uncertainty. All eyes and ears will focus on the Fed this week. Will a recession — even a temporary one — be inevitable to put a stop to out-of-control inflation? 

Contact Susan Tompor via [email protected]. Follow her on Twitter @tompor. To subscribe, please go to Read more on business and sign up for our business newsletter.