The S&P 500 is on track for its worst January ever. Here’s why stocks are getting hit so hard
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Traders are seen working on the New York Stock Exchange’s floor (NYSE) in New York City on February 5, 2018.
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It is a sea of redStocks are down on Monday in the stock exchange. There are many factors that can cause stocks to fall in January.
Monday’s drop in the Dow Jones Industrial Average was as large as 1,000. The S&P 500 is off by 2%, with only a handful of companies in the entire index trading in the green. The Dow and S&P 500 are now on pace for their worst month since March 2020, when the market fell into turmoil amid the pandemic.
The Nasdaq composite fell 4.2% Monday. It is currently on track for the worst start to 2008, when it was at 4.2%.
And maybe most notably, the S&P 500, off 10% this month, is headed for its worst January ever. It is not common for the stock market to start the year with a strong foundation as investors place money in stocks.
What is the reason for this sell-off
Although some markets were more volatile or expensive than others, they began to show signs of trouble in November. However, the overall market saw a significant decline in the first week in January as a result of increasing indications from the Federal Reserve about the Federal Reserve’s willingness to take aggressive measures to reduce the rise in consumer prices.
The Wells Fargo Investment Institute sent a January 19th note to its clients, stating that “Over the past month the Federal Reserve(Fed) had made it increasingly clear it is serious about fighting against that inflation”.
Central bank officials have indicated that they plan to end asset purchases and increase rates, as well as reduce their balance sheets. This will happen in March. In preparation for rate hikes, government bond yields surged. The U.S. 10-year Treasury rose more than 40 basis points to almost 1.9% this year after ending last year at just over 1.5%. (1 basis point equals 0.01%.)
A total of four rate rises will be expected by investors this year. Officials warn that there may need to be more, as Wall Street pros only anticipated one or two increases a while back.
Yardeni Research founder Ed Yardeni said Monday that the Dec. 15 minute news was a surprise to investors. He spoke on CNBC’s Halftime Report.
On Wednesday, the Fed will provide its most recent update. Market experts think it is unlikely that the Fed will raise interest rates during this meeting. However, the current high inflation rate suggests the market believes otherwise. central bank will stick with its plan tighten financial conditions despite the market decline.
Investors are also concerned by persistent inflation and disruptions in supply chains due to new Covid variations. There is also the possibility of conflict in Ukraine.
Tech leads the charge down
Stocks of technology with high valuations were hit first, and they continue to be hit.
The technology-focused Nasdaq composite fell into correction territory last week. This was a 10% decrease from the November 2021 record closing. The index is now in a deeper rut and only a few percentage points from a bear market.
As rates rise, rising bond rates tend to penalize growth stocks. This is because their earnings growth becomes less appealing as they climb. Wall Street analysts are now better able to predict the economic future after a pandemic. This has also led to lowered growth prospects for tech stocks.
“Since the close of 3Q21 earnings estimates for 2022 [the Nasdaq 100] fell 0.8%, while estimates for the S&P 500 rose 1.9%, indicating weaker fundamentals for Growth stocks relative to the overall market,” Bank of America equity and quant strategist Savita Subramanian said in a note on Monday.
Tech names make up a large portion of the largest stocks on the stock market, and their fall can have an impact on the overall market. As investors abandon risk assets and sell them, selling pressure continues to feed on itself, driving every stock except energy lower in January.
Also, the cryptocurrency market was hard hit. On Monday, bitcoin’s price fell to $34,000. This brings its total losses for the year down to around 30%. The largest cryptocurrency lost approximately 50% since November’s record-breaking high.
Bitcoin’s all-time peak in November has fallen by roughly half.
CNBC
Over the same time, the price of ethereum also fell.
Spots of light
The economy’s health is good, that’s for sure. After a record-breaking year of nonfarm payrolls increases, the unemployment rate is now 3.9%. The other indicators of economic growth, while showing a slower recovery in 2021, are still positive.
Even with some disappointment reports by high-profile companies, earnings season seems to be turning out as a good one. More than 74% of S&P 500 companies that have reported results have topped Wall Street’s earnings expectations, according to FactSet.
Also, Covid-19 case numbers are falling. After exploding to staggering new highs amid the spread of the highly transmissible omicron variant, Covid-19 cases started to come down in New York State over the last two weeks, according to Gov. Kathy Hochul hoped that similar waves could be seen in other regions of the U.S.
This report was contributed by Michael Bloom, CNBC.
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