Reuters: New York : There will be a big test for the volatile stock market next week when the U.S. Federal Reserve is expected to raise interest rates and give more information about how it plans to fight rising inflation.
As a result, the S&P 500 index has dropped 13.3% in the first four months of 2022, which is the steepest four-month drop in any year since 1939.
It’s not clear how quickly the central bank will change its policy, but investors have raised their expectations. Many people are worried that the Fed won’t be able to keep the economy going as it fights the worst inflation in nearly four decades.
Investors have been angry about everything from rising bond yields to the war in Ukraine and, more recently, lockdowns in China. The market is also about to enter a six-month period in which stocks have been weaker in the past.
People who work for Charles Schwab (NYSE: SCHW) in Austin, Texas, say that the markets are going to be a lot more choppy and volatile for a while because of the uncertainty. “In 2021, things went the other way right away.
At the Fed’s meeting on Wednesday, most people think it will raise interest rates by 50 basis points. In addition, they are waiting for clues from Fed Chairman Jerome Powell about interest rates, the central bank’s plans to cut back on its balance sheet, and when inflation will start to fall again, among other things. First since 2018: In March, the rate was raised by 25 basis points.
Investors will be worried if the Fed keeps predicting high inflation and doesn’t think it will stop, “said Michael Arone, the chief investment strategist at State Street (NYSE: STT). If the Fed keeps raising interest rates and tightening monetary policy, which the market expects them to do, “it could mean that they will do so even more quickly.”
Beyond next week, policymakers have agreed to raise the federal funds rate to at least 2.5% by the end of the year.
After March’s consumer price index showed an annual rise of 8.5%, the largest rise in more than 40 years, officials will have to decide how long they will keep raising interest rates.
Kei Sasaki, a senior portfolio manager at Northern Trust (NASDAQ: NTRS) Wealth Management, says that “if there is even more of a hawkish tone coming out of that meeting, then that could certainly be viewed as negative.” This is because there are signs that inflation has already peaked.“
Shares of Amazon (NASDAQ: AMZN) plunged 14% on Friday after the company reported disappointing earnings. The S & P 500 dropped 3.6%, its biggest one-day drop since June 2020.
The S&P 500 fell the most in April since the coronavirus pandemic began in early 2020, and the tech-heavy Nasdaq fell the most since the 2008 financial crash.
People are getting ready for more monetary policy to be done, so bond prices have risen this year. The yield on a 10-year Treasury note is now about 2.9%, up from 1.5% at the end of 2021.
That has hurt tech and growth stocks because their value is based on future cash flows that aren’t true when investors can make more money on risk-free bonds. The Russell 1000 growth index has lost about 20%.
Investors aren’t having a good day. The percentage of individual investors who said their six-month outlook for stocks was “bearish” rose to 59.4%, the highest level since 2009. This is the American Association of Individual Investors’ highest level since 2009.
As it turns out, though, following a drop in the stock market recently, some comfort may come from the Fed’s actions. Following the Fed’s expected rate rise in March, the S&P 500 rose more than 8% over the next two weeks. Investors are going to keep an eye on corporate results after a mixed week of earnings from big companies like Apple and Google. Pfizer (NYSE: PFE), Starbucks (NASDAQ: SBUX), and ConocoPhillips (NYSE: COP) reports, among many others, are due next week.
In May, the calendar turns to show that the season could be a factor for investors, too. During the six months from November to April of every year that CFRA looked at since 1946, the S&P 500’s best six months were from November to April, when the index rose an average of 6.8%, the CFRA report said.
The index, on the other hand, has only risen 1.7% on average from May to October. It hasn’t been as strong of a trend in the last few years, though. According to Reuters, the S&P 500 has gained 7.2% in the last five years from May to October, but only 5.2% from November to April. This time, I don’t know how important seasonality will be, said Jack Ablin, the chief investment officer at Cresset Capital Management.
