Stock market investors’ nerves tested by inflation, omicron, Russia
The stock market is losing crucial support from the Federal Reserve. Omicron is wreaking havoc in businesses around the world. And Russia may well be preparing to invade Ukraine, creating more uncertainty and raising the prospect of even higher oil prices.
No wonder investors are panicking and selling stocks.
The S&P 500 fell nearly 10% from its record set on the first trading day of the year, the biggest setback for Wall Street since its collapse when the pandemic first hit. And market moves have been fierce amid growing uncertainty.
The S&P 500 posted four straight 1% declines through Friday, the longest such streak since late 2018. The streak only came to a halt after the S&P 500 made a slight gain on Monday, when a furious 11th hour rally erased what had been a 4% loss. Tuesday was another volatile and declining day for stocks.
For nearly two years, investors poured money into stocks, believing that the Federal Reserve would help keep stock prices upright. The Fed’s ultra-low interest rates and the rapid recovery of the US economy from the pandemic recession have made stocks a more lucrative bet than safer investments such as low-yielding bonds.
The S&P 500 more than doubled between its March 2020 pandemic low and the end of last year.
But the Fed is now threatening to shut down the party.
Determined to quell the highest inflation in four decades, the US central bank is moving away from its easy money policy and preparing to raise interest rates. And that means trouble for the stock market. As rates rise, bonds will look more attractive, which will likely encourage investors to pull their money out of the riskier areas of the market.
Worse still, higher rates risk slowing the U.S. economy, curtailing consumer spending and hurting corporate profits that drive stock prices higher. The prospect of higher rates is one reason the International Monetary Fund on Tuesday cut its forecast for U.S. economic growth this year to 4% from the 5.2% it predicted in October.
The unknowns are daunting: The Fed hasn’t had to raise interest rates sharply to fight inflation since the early 1980s, and policymakers have no experience dealing with pandemic aftershocks at all. world. Omicron and other COVID-19 variants threaten to disrupt business activity in unpredictable ways.
As if all that weren’t enough, the tension over Russia’s threat to invade Ukraine – and the likelihood that the United States will retaliate with sanctions – could drive up oil prices and put further pressure on the EU. Mondial economy.
Investors don’t see volatility disappearing any time soon. The VIX index, which measures how much investors are paying to hedge against stock declines over the next 30 days, recently hit its highest level since October 2020.
The heaviest losses from the rapid market readjustment have hit large, fast-growing companies that were previously the biggest stars of the pandemic. Amazon has lost almost 18% since Jan. 3 and Tesla has lost more than 23%. Netflix, another pandemic darling, is down nearly 39%.
The damage was widespread, with the most speculative corners of the market particularly affected. Bitcoin has fallen more than 40% since hitting an all-time high in November. The smaller companies in the Russell 2000 index, many of which are losing money, have fallen 18% since the peak in early November.
And the “meme stocks” that soared almost exactly a year ago have also fallen. GameStop has lost almost a third of its value so far in 2022, and AMC Entertainment is down 41%.
For those who warned the prices were too high, it feels like the late beginning of the end for a spectacular run.
“Today in the United States we are in the fourth superbubble in the past hundred years,” noted value investor Jeremy Grantham said in a recent report. He says not only are US stocks in a bubble, but so are real estate and bonds.
Grantham squarely blames the Fed for keeping conditions too easy and encouraging prices to rise too high, just as he said before the dotcom bubble burst in 2000 and before the financial crisis in 2008.
“How Did It Happen: Will the Fed Ever Learn?” Grantham wrote.
Today, with the consumer price index showing inflation at 7%, Wall Street sees the Fed moving aggressively in the opposite direction. Investors are pricing in a 66% chance that the Fed will raise the short-term rates it controls by a full percentage point this year. A month ago, those same investors saw less than a 35% chance of that happening.
At the same time, they expect the Fed to unload some of the trillions of dollars in bonds it amassed during the pandemic to keep long-term rates low. It would also have the effect of pushing bond yields higher and tightening credit, just as another rate hike would.
Even before the Fed begins to tighten its stances, the US economy appears to be losing momentum.
Omicron and other variants can make Americans more reluctant to shop, reducing consumer spending that drives 70% of US economic activity. Continued virus outbreaks also risk disrupting factories and ports, worsening existing supply chain bottlenecks and driving up inflation. And the economy won’t get a repeat of the massive government spending that fueled strong growth last year.
Higher rates in the United States could also have global repercussions, attracting investment from other countries, particularly in developing countries, and destabilizing global financial markets.
With the European Central Bank not expected to raise rates until well into 2023, bond market rates have started to rise from very low levels, indicating that investors believe the ECB will eventually accelerate. also the pace of stimulus withdrawal.
Compared to the United States, Europe’s near-term growth prospects have weakened due to the high number of omicron variant COVID-19 cases, high oil and gas prices and continued shortages of semiconductors and other parts that have hampered manufacturers, especially the automotive industry.
Higher rates only add to the risks and uncertainties.
“Fed tightening always ‘breaks’ something,” wrote Michael Hartnett, Bank of America’s chief investment strategist, in a recent BofA Global Research report. He expects stocks to fall in 2022 due to “rate shock” at the start of the year and then “recession panic” in the second half of the year.
Others on Wall Street see the market decline as temporary. Stocks have historically lost an average of 6% in the three months following the Fed’s first hike as part of a rate hike campaign. But the S&P 500 generally continues to rally and return an average of 5% in the six months after the first rise, according to Goldman Sachs.
Associated Press writer David McHugh in Frankfurt contributed to this report.