Why is the U.S. Stock Market Falling in 2022?
The U.S. stock market will start in earnest in 2022. The S&P 500, widely regarded as a critical indicator of U.S. stock market performance, fell 13.3% in April; This is the sharpest drop since 1939. The index continues to decline in May. It fell 16% as of Tuesday’s close. This brought it closer to the 20% threshold that some investors consider to confirm the bear market. For the Nasdaq Composite, which is heavier on technology stocks, the decline was more serious; The total has fallen by about 25% this year.
The S&P 500 started the year with a doubling of the low set in March 2020. An ascent developed in the opposite direction almost immediately after the calendar moved to 2022. A significant factor in market weakness by investors and analysts is the policy change in the Federal Reserve. As soon as the pandemic spread, the U.S. Federal Reserve introduced an emergency policy to stabilize the economy; This, according to investors, will also encourage the purchase of stocks and other more risky assets. However, in early 2022, the Federal Reserve showed that it was pursuing a tighter monetary policy to reduce rising inflation. This is a significant change in the investment climate.
The Fed grew interest rates in Spring, for the very first time since 2018, with 25 baseline rates. Earlier this month, the central bank raised rates by another 50 basis points; This is the most significant step in 22 years. Fed Chairman Jerome Powell has hinted that a similar increase could ensue. It also begins to release assets accumulated during the fight against pandemic effects.
Fed and Stocks
The decisions aggravated the actions in several directions. Although stocks have risen over many cycles of rising Fed rates, some investors worry that rising inflation and high commodity prices may force the central bank to tighten more aggressively. This will potentially hurt growth and push the economy into recession. At the same time, expectations of a more brutal Fed policy have driven previously dormant bond yields. Yields on 10-year U.S. Treasury bonds have already nearly doubled to 3% this year. This is the first time this level has been exceeded since the end of 2018, When the Fed reached the end of the last tightening cycle.
As yields increase, bonds become a more competitive investment for stocks; The 10-year treasury income is about twice the S&P 500 dividend income, which is valued for their potential cash flows and loses attractiveness as bond yields increase. Investors say the impact has been reflected in a considerable decline, which was observed due to post-pandemic growth bets. The Russell 1000 growth index fell by 24% this year.
Beyond the Fed change, Russia’s war in Ukraine has created further economic uncertainty. For example, a disorder caused a delivery shock. This contributed to the rise in prices for oil and other commodities. At the same time, it has caused particular concern to the European economy. Other factors that have recently led to stock volatility; include concerns about the Chinese economy. The blockade in the country to control COVID-19 has led to production activity there.
Investors want to see hints that inflation in the U.S. is peaking to enable the Fed to pull back from potentially more aggressive actions. The publication of Wednesday’s Consumer Price Index for April is the following noteworthy report. Some investors are looking at technical indicators. Such as whether the S&P 500 can hold critical levels such as 4,000 and for “washing out” sellers, especially on days of reduced volume days, Or the CBOE volatility index reaches certain heights.
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