US stock market suffers worst start to the year since Great Depression

The US stock market is suffering its worst start to any year since the Great Depression as a boom fuelled by cheap money turns into a painful bust.

© Timothy a clary / AFP US stock market inflation – Timothy a clary / AFP

Shares on the S&P 500 are down 22.3pc on a total returns basis so far this year, according to analysts at Deutsche Bank, just outstripping the 22.2pc drop in the first half of 1962.

It also marks a worse start to the year than the 19pc plunge in the first half of 1970, after US inflation surged to its highest in almost two decades, and a 17pc drop in 1940 when France was invaded by Germany.

It comes following a boom in markets, powered by emergency low interest rates and government-funded pandemic support.

Economists have warned that the US is now on the brink of recession as borrowing costs surge and fiscal stimulus dries up.

The past collapses which Jim Reid at Deutsche Bank listed were all followed by significant recoveries in markets, but he said that is not a given this time around.

He said: “If we don’t see a recession materialise over that period it might be tough for markets to continue to be as bearish as they have been, and a bounce back resembling history might be possible.

“However, it’s hard to see markets recovering if we see firm evidence of the recession.”

The Federal Reserve is raising interest rates rapidly to tackle rampant inflation. So far it has hiked interest rates from 0.25pc at the start of March to 1.75pc.

Last week it increased rates by 0.75 percentage points, the sharpest increase since 1994. Jerome Powell, the Fed’s chairman, said more jumps of a similar scale could be on the way, with a growing share of analysts forecasting that a recession is in the offing as a result.

Economist Aichi Amemiya at Nomura said “the Fed’s efforts… will ultimately drive the economy into a mild recession”.

Mr Amemiya said he expected the US economy to shrink 1pc in 2023, with unemployment rising to 5.2pc next year and 5.9pc by the end of 2024, even as “policymakers’ hands are tied by persistently high inflation, limiting any initial support from monetary or fiscal stimulus”.

Tim Congdon at the Institute of International Monetary Research said “enough has already been done to bring US inflation under control”, with higher interest rates and quantitative tightening, as the Fed withdraws some of the support offered in the pandemic.

He said: “Just as the surge in bank deposits and broad money in spring 2020 presaged a surge in asset prices and an inflationary boom, so the stagnation in deposits and money now foreshadows a period of asset price weakness and a recession.”

The UK economy is also on the brink of recession, as the Bank of England expects GDP to fall in this quarter as well as in the final three months of the year, when the cap on household energy bills rises another 40pc and inflation tops 11pc, a fresh 40-year high.

Holger Schmieding at Berenberg Bank said the UK is already in recession with the eurozone soon to follow and the US tipping into stagnation and then contraction later this year and for much of 2023, with energy prices battering Europe and higher interest rates hitting the US.

Mr Schmieding said: “The ongoing surge in energy and food prices, coupled with still severe supply constraints, is dealing a major blow to the economic outlook for the developed world and beyond.

“While sky-high prices for energy and food erode the real purchasing power of consumers, the surge in inflation to 40-year highs in Europe and the US is forcing central banks to tighten monetary policy sharply at a time when real economic growth is already losing momentum.”

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