January was brutal for stocks. Here’s why.
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Wall Street was thrown headlong into a sea of turbulence in 2022.
U.S. stocks have posted three straight weekly declines to start the year, as spooked investors fear the Federal Reserve may tighten monetary policy more aggressively than originally expected to fight soaring inflation. That uncertainty has sent the market’s fear gauge, the Cboe Volatility Index, up nearly 100% year-to-date, and unfolded in stunning fashion on Monday as the Dow Jones Industrial Average cratered and then clawed back a deficit of more than 1,000 points – a first – to end the session in the green.
The swings can be dizzying, but experts are quick to note that volatility is a healthy part of the market because it presents opportunities in the form of bargain prices.
“Investors must now decide whether this is a chance to buy on the dips or the first sign that there are problems ahead,” Mold said Tuesday in comments sent by e-mail. email to The Post.
Here’s what investors are watching — and what can send them into a tailspin.
Wall Street is swirling around any sort of unresolved tension, and the larger the possible implications — whether it’s the fallout from the latest coronavirus variant or a pending policy decision — the wilder trade tends to become.
“Markets hate uncertainty,” Wayne Wicker, chief investment officer at MissionSquare Retirement, told The Post in an email. “And the confluence of higher interest rates, higher inflation and subdued earnings growth is driving volatility high right now.”
Anxiety can manifest in the form of massive swings, like those seen at the start of the coronavirus crisis as investors tried to adjust to a new reality. Although the pandemic continued to wreak havoc on traders, from supply chain grunts to the endless march of variants, the spasms of panic became less severe as the unusual became routine and businesses were delivering a steady march of healthy earnings reports.
“Investors have become accustomed to steady and consistent gains over the past two years, which makes the current bumpy ride more uncomfortable,” Jeff Buchbinder, equity strategist at LPL Financial, said in comments sent by email on Monday. email to The Post.
He noted that volatility is still well within historical ranges: the S&P 500 averages three pullbacks of 5% or more and one correction — defined as a 10% decline from the most recent high — each year.
“After a pullback of no more than 5% in 2021 and the S&P 500 more than doubling from March 2020 lows, we expect greater volatility in 2022,” Buchbinder said.
Monetary policy changes
Much of the recent market machinations have been tied to fears over Federal Reserve policy as the central bank tries to fight inflation. Americans are facing higher gas pump prices at the grocery store, and higher interest rates could ease some of that pain. But rate hikes are a double-edged sword that can also limit economic activity, which often hits stocks hard, especially high-profile companies.
“The Fed is walking a delicate tightrope between the Omicron-induced economic slowdown and ever-higher consumer price and wage inflation,” Lauren Goodwin, senior director of New York Life Investments, said in comments on Tuesday. emailed to The Post.
The Fed’s shift to less supportive policy comes after more than a decade of central bank policy aimed at preventing prices from collapsing in an economy-damaging deflation cycle. It has forced investors to reassess the assets they hold, as central bank officials prepare to raise rates from near zero – and the outlines of a reshaped economy are beginning to emerge from the fog of the pandemic.
Van Hesser, chief strategist at KBRA, a bond rating agency, calls the economic shift “the great deceleration.” He expects the economy to continue to grow this year above its long-term potential of around 2%, but notes that 10 of the last 15 Fed rate hike cycles have resulted in recessions.
“The ‘R-word’ is back on people’s radars,” he said.
But Julian Koski, chief investment officer at New Age Alpha, said investors shouldn’t assume that higher interest rates will have a hugely negative effect on future stock prices.
“Investors shouldn’t assume a direct correlation because stock price movements are much more complicated and never depend on a single cause,” Koski said Tuesday in comments emailed to The Post. “Our advice to investors is to focus less on what the Federal Reserve can or cannot do and instead focus more on the individual stocks they own and the ability of those stocks to meet the growth expectations that are included in their valuations.”
Traders are watching economic data breathlessly for insight into the health of the global economy (as this, in turn, will impact company results.) Employment figures – such as weekly unemployment claims or monthly employment reports from the Bureau of Labor Statistics – productivity, consumer confidence and economic growth – such as GDP or retail sales – can influence the markets any day, as investors analyze the data and incorporate it into their long-term outlook.
So far in 2022, the most crucial scenarios have been the relentless march of inflation to the highest levels since the 1980s and the vexing tightness of the labor market, where workers quit their jobs at rates records and more than 10.5 million jobs remain vacant nationwide. Coronavirus rates, including infections, deaths and hospitalizations, have also swayed investors as they try to gauge the pandemic’s impact on business activity, in the form of trade restrictions, reduced foot traffic and reduced productivity.
Michael Farr, managing director of Farr, Miller & Washington, said the economy, despite the whirlwind of imbalances and uncertainty, is “fundamentally sound”.
“The consumer is healthy, the economy is growing and unemployment is low,” Farr said Monday in comments emailed to The Post. “Yet I am concerned about inflation, labor market inequality, supply chain issues and the fact that we are still in a pandemic.”
He warned investors to keep a cool head amid the storm of supply chain slowdowns and omicron infections and to take a long-term view.
“To keep these possible futures in mind and look at the risk/reward over the time horizon of an investment leaves no mental leeway for panic,” Farr said.
Corporate earnings are among the most powerful drivers of stock prices. Good quarterly results can generate positive interest in a company and drive stocks higher, while the reverse can undermine investor confidence which, in turn, can shave millions off their market capitalization.
After stocks plummeted in the early stages of the pandemic, it was strong corporate earnings that restored investor confidence and helped fuel the market’s record run in 2021. Over the past six quarters, real corporate earnings S&P 500 companies have exceeded estimated earnings by a whopping 17.5%, according to FactSet analysis.
The S&P 500 index is expected to post year-over-year growth of more than 21% in the fourth quarter, FactSet estimates, but sustaining growth going forward could become more difficult as companies try to gain gains in a less accommodating environment. Investors are hungry for good news in the volatile atmosphere, and they will look to the earnings of giants like Apple, Tesla, Microsoft to provide stabilizing force to the markets. General Electric shares fell more than 7% on Tuesday despite falling profits as investors whitewashed a reported $3.8 billion loss last quarter due to supply chain headaches .
“Only exceptional results will have a real impact in the current climate,” said Danni Hewson, financial analyst at AJ Bell, on Monday. “And the fear is that any hint of disappointment could hit the markets even harder.”
Conflicts with global implications are a major source of risk for investors, as they can affect the economy in diffuse and unexpected ways. Omicron’s devastation continued to complicate the international travel picture and the overall health of the economic recovery, as businesses around the world grapple with the fallout from the spike in infections in the form of trade and travel restrictions. and staff shortages.
Investors have also been rattled in recent weeks by Russia’s military encroachment on Ukraine and a series of missile attacks in the Middle East, both of which could cause potential disruptions in energy markets. .
On Tuesday, the Biden administration confirmed it was trying to secure energy for European allies in case Russia halts oil and gas exports in response to sanctions imposed for an invasion of Ukraine, according to reports. from CNBC.
The Cboe Crude Oil Volatility Index hit an all-time high in 2022 in response to the tangle of tensions. And oil markets — which bucked the year’s negative trends as supply issues and inflationary pressures pushed prices higher — continued to rise, with Brent and West Texas midstream crude both trading more than 1.6% higher on Tuesday.
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January was brutal for stocks. Here’s why.
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