So Far, 2022 Has Been S&P 500’s Worst Start in 90 Years
The S&P 500 has dropped almost 10% since 2022 started. According to Bloomberg data, this is the worst start to a year for the S&P 500 over the past nine decades. The US stock market has never been down this much during the first 16 trading days of a year.
S&P 500 Eyeing a Correction
The S&P 500 is eyeing its first correction since 2020 when the global markets collapsed due to Covid-19. A correction is confirmed when an index closes down by 10% or more compared to its record closing level. At the time of writing, the S&P 500 is down by over 10% from its record closing high on January 3.
The Russell 2000, an index comprised of 2,000 small-cap companies, plunged by 2.8% on Monday. The index is down by over 20% from its November 8 peak, which puts it on course to confirm a bear market. Furthermore, other indices like NASDAQ, Dow Jones Industrial Average and NASDAQ Composite are also down.
Experts believe several factors have contributed to this worsening market sentiment. For one, the Federal Reserve would have its first meeting of the year, a two-day monetary policy meeting, on Tuesday. The central bank is expected to tighten monetary policy and increase interest rates to cope with rising inflation, a move that weighs on the outlook for stocks.
Sam Stovall, chief investment strategist of CFRA Research in New York, said:
“I think investors are over-assuming a very hawkish stance by the Fed. Granted, inflation is high and is likely to get higher before it starts to decline. Specifically we see the headline CPI topping at 7.3% for both January and February, but then coming down to 3.5% by year-end.”
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Multiple Factors Spook Investors as US Stocks Dip
Market confidence was further affected by the geopolitical tensions as many fear war breaking out between Russia and Ukraine. The US has recently asked family members of U.S. Embassy personnel in Ukraine to leave the country. In a briefing with reporters, senior State Department officials also said that some diplomats have been authorized to depart.
The order, which was a clear sign that the US government is preparing for an aggressive move by Russia, has caused anxiety and uncertainty among investors. The CBOE Volatility index, an index that represents the market’s expectations for volatility over the coming 30 days, is currently trading at its highest level since January 2021.
Darren Schuringa, chief executive officer of ASYMmetric ETFs in New York, said:
“Ukraine clearly is a concern that’s weighing on the markets today. This will continue to weigh on the markets for the foreseeable future until there’s some type of resolution and more clarity as to what the outcome looks like.”
Meanwhile, technical analysis on the charts also suggests that more volatility is heading towards the markets. According to Rich Ross, technical strategist at Evercore ISI, the S&P and NDX have fallen below their 200 day moving average (dma), which implies that markets have entered a downtrend. Ross said:
“The Fed pulled the punchbowl, liquidity has evaporated, and the S&P and NDX broke below their 200dma for the first time since the Covid outbreak.”
Ross predicts the S&P 500 to plunge to the 3,800 level. Considering that the index closed the last session at 4,410, Ross expects the index to lose around 15%. He said this scenario would likely play out given “the dramatic erosion of the technical backdrop, in conjunction with the highest inflation, tightest policy, and most uncertain political and geopolitical condition in years.”
It is worth noting that large stocks have also been hit harshly. Among the mega-cap technology stocks, TSLA shares have suffered the most, dropping by more than 13%. Netflix, which performed quite strongly during the pandemic, has now slid over 10%.
How do you think the markets would react following the Fed meeting? Let us know in the comments below.