By Lewis Krauskopf

NEW YORK (Reuters – In 2022, the stock market in America is at a rocky start.

Since 1939, the, widely used as the benchmark of U.S. stock markets performance, fell 13.3% from April to its lowest point in four months. In May, the index continued to decline and fell 16% in April. As Tuesday’s close showed, it was nearing 20% which some investors view as confirmation that there is a bear market.

The decline in technology shares has been worse for the than the, with 25% of their share falling so far this fiscal year.

What IS THE WEIGHING ON STOCKS FOR THIS YEAR?

The S&P 500 started the year having more than doubled from the lows it hit in March 2020, an upswing that went into reverse almost immediately as the calendar flipped to 2022.

Analysts and investors cite Federal Reserve policy as the primary reason the market is weak. As panic set in, the U.S. central banking put in place emergency policy to stabilize the economy. This encouraged investors to buy stocks and other potentially riskier assets. However, the Fed indicated in early 2022 it was moving to tighter monetary policy in an effort to curb inflation. This markedly changed the investor environment.

WHY DOES THE FED PIVOT HURTS STOCKS

The Fed increased interest rates by 25 basis point in March for the first-time since 2018. In March, the Fed raised interest rates by an additional 50 basis points. This was the most significant move in 22 year. Fed Chair Jerome Powell suggested that more increases may follow. The Fed also began to dismantle assets acquired during the fight against the effects of pandemic.

Stocks have been affected by these decisions in a variety of ways. Although equities rose during past Fed rate-raising cycles (which included a number of rises), some investors are concerned that rising inflation and high commodity prices will force the Fed to tighten its belt more quickly, which could lead to a slowdown in growth and a possible recession.

Expectations of tighter Fed policies have also pushed up bond yields that were previously inactive. Since late 2018 when the Fed was nearing the close of its last tightening cycle, roughly 3% has been achieved on the U.S. Treasury Note 10-year.

With yields rising, bonds are a more competitive investment to stocks, with the about twice the level of the dividend yield for the S&P 500.

Technology and high-growth industries are less attractive due to higher bond yields. These sectors are valued for potential cash flows, and fall in value when they rise. According to investors, this has led to significant declines in certain post-pandemic growth investments. The Russell 1000 growth index fell 24% last year.

What ELSE CAN CONTRIBUTE TO STock Weakness?

The Fed’s changes have not made economic sense. Russia’s conflict in Ukraine has created more uncertainty. The turmoil in Ukraine has caused an economic shock, which has led to higher oil prices and other commodities, as well as raised concerns over Europe’s economy.

Stock volatility has also been caused by concerns about China’s economy. Production activity has been affected by the COVID-19-related lockdowns.

What SIGNS are INVESTORS Trying to Find in Order To Avoid Declines?

Investors are looking for signs that U.S. inflation has reached a peak to allow the Fed to halt potentially aggressive action. The next important report is Wednesday’s release of the April consumer price index.

Some investors are looking at technical indicators, such as whether the S&P 500 can hold key levels, such as 4,000, as well as particularly heavy days of downside volume to “wash out” the sellers, or the CBOE volatility index hitting certain heights.