A chaotic day on Wall Street extended the longest period of market turmoil since 2001, with stocks on Friday briefly descending into bear market territory, a symbolic marker of investors’ deep pessimism about the health of the global economy and the buying power of the American consumer.
The S&P 500 has fallen for seven consecutive weeks, its worst stretch since the dot-com bubble burst more than two decades ago. After a 3 percent drop this week, the index is down 14 percent since early April.
Friday afternoon, the S&P 500 crossed the bear market threshold of a 20 percent decline from its peak on Jan. 3. But with less than 30 minutes left before trading ended, after hours of churn and a drop of as much as 2.3 percent, the market rallied and ended a hair above where it started the day.
That was little consolation for investors, many of whom have grown accustomed to years of robust returns and have never seen a market upheaval like this.
With this week’s relentless slide and Friday’s wild swing was a constant worry on Wall Street that rising inflation, compounded by the war in Ukraine, might tip the economy into a recession. At the heart of those fears was fresh evidence reported this week from retailers like Walmart and Target that rising costs were now hitting corporate America.
During the darkest days of the pandemic, the American economy was propelled by consumers. Even as the costs of goods, transportation and labor increased, companies were able to pocket record profits by raising prices, confident that people would continue buying. But this week brought indications that some consumers may have reached their limit, and profits have started to shrink.
“What the companies are telling us is that they are starting to notice that their consumer is responding to inflation,” said Jay Sole, a retail analyst at UBS. “We were worried about this moment and we were waiting for this moment, and now it’s here.”
Recessions have often followed bear markets, though one does not necessarily cause the other. A bear market occurred in the early days of the coronavirus pandemic, but it was the shortest on record, lasting just 33 days before stocks began to rally. Less than six months later, the S&P 500 began hitting new highs again, climbing 42 percent above its prepandemic level before starting to slide in January. Now the index is down more than 18 percent from its high point.
Friday’s turbulent trading came after months of investors fretting about how serious and long-lasting inflation would be and how aggressively the Federal Reserve would have to raise rates to slow the rising cost of living.
James Bullard, the president of the Federal Reserve Bank of St. Louis, said during an interview on Fox Business on Friday that raising interest rates by half a point at coming central bank meetings is “a good plan for now.”
Mr. Bullard struck a relatively unconcerned tone about markets, despite the day’s volatility.
“You would expect with the Fed raising rates, that all of these assets — trillions of dollars worldwide — would have to be repriced,” Mr. Bullard said.
What set this week apart was a grim earnings report on Tuesday from Walmart, the nation’s largest retailer, which confirmed many investors’ worst fears about inflation.
For the first time in many years, Walmart said its quarterly profits fell, a sign to many analysts that the retailer could not pass along many of its rising costs to consumers without risking a slowdown in sales. Target and Kohl’s also said quarterly profits plunged, adding to Wall Street’s unease.
Walmart said that some of its customers were buying less-expensive meats and other food items as costs soared, and that sales of certain discretionary goods like clothing had slowed, as budget-conscious shoppers focused instead on buying necessities like groceries. The company’s executives said they saw no signs of inflation starting to abate.
“There is a lot of uncertainty moving forward,” Walmart’s chief executive, Doug McMillon, said in a conference call with Wall Street analysts on Tuesday. “Things are very fluid.”
Globally, investors can find little comfort. The Russian invasion of Ukraine and the response from other countries has disrupted crucial supplies of energy, wheat and other staples. Poor countries face a gathering catastrophe over hunger and debt.
Janet L. Yellen, the Treasury secretary, said high food and energy prices were creating “stagflationary effects” — the combination of high inflation and a stagnating economy. China’s economy, the world’s second-largest after that of the United States, is laboring under the government’s strict pandemic lockdowns. Before the war in Ukraine and Covid’s resurgence in China, the International Monetary Fund was projecting global growth of 4.4 percent this year. Now its forecast is 3.6 percent.
Wall Street had been expecting that torrid consumer demand would have to slow at some point. Government stimulus checks that provided Americans with billions in spending money during the pandemic stopped long ago. The hope of both the Trump and Biden administrations was that the economy could eventually be weaned off the stimulus and that consumer demand would stay relatively strong.
But inflation, which has risen faster and remained more persistent than many investors and even the Fed initially expected, has thrown the recovery into doubt.
Unemployment is approaching the lowest rate in decades, and the economy has regained nearly 95 percent of the 22 million jobs lost at the height of coronavirus lockdowns. Average hourly earnings in the U.S. rose 5.5 percent in the year through April, but many of those gains are being eroded by inflation. Over that same period, prices rose 8.3 percent.
“The government just turbocharged the economy, and we were partying on buying goods,” said Scott Mushkin, the founder of R5 Capital, a retail-focused consulting and financial research firm. “People wondered what the hangover would be like. We have never seen anything like this.”
To be sure, some retailers said that not every consumer was pulling back or shifting spending. Walmart said better-off shoppers continued to spend freely on bigger-ticket items like patio furniture, and Target said it was not seeing a broad retreat in spending, either. Home Depot, which has benefited from a pandemic remodeling boom, said it was seeing no big slowdown in business.
But Mr. Sole of UBS worries that if prices continue to climb, higher-income consumers will eventually shift their spending, too.
“Right now, lower-income consumers are feeling inflation more acutely,” he said. “The worry is, what if it affects all income and demographic groups?”
For months, the mixed signals have been confounding Wall Street as it tries to forecast future profits and how high interest rates will climb.
The current conditions are also confusing to even the most experienced executives, who are finding it difficult to plan their inventory and staffing. Walmart, which is known for successfully navigating the last period of persistently high inflation, in the 1970s, acknowledged this week that it had too many employees in the first quarter and that it had not anticipated how rapidly the increase in gasoline prices would inflate costs in its supply chain. The company’s 25 percent decline in profit from the previous year was a big surprise to analysts.
“If these companies can’t handle this, it tells you something really unusual is afoot,” Mr. Mushkin said.
Coral Murphy Marcos, Jason Karaian, Jeanna Smialek, Lananh Nguyen, Marie Solis, Melina Delkic, Mohammed Hadi, Rich Barbieri, Stephen Gandel, Vikas Bajaj and William P. Davis contributed reporting.