Stocks closed higher on Monday but still posted their worst monthly loss since the early days of the pandemic, as Wall Street closed a tumultuous January wracked by fears that impending interest rate hikes could make everything in the markets more difficult. The S&P 500 rose 1.9%, but is still down 5.9% since setting a record exactly four weeks ago. It lost 5.3% this month, its worst since plummeting 12.5% in March 2020, when it bottomed out after the pandemic suddenly brought the global economy to a halt. The 10-year Treasury yield rose to 1.79% from 1.77% on Friday.
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Stocks rise on Monday, paring some of their worst monthly losses since the early days of the pandemic, as Wall Street closes a tumultuous January wracked by fears that impending interest rate hikes will make everything in the markets more difficult.
The S&P 500 was up 1.2% at 3:28 p.m. EST. It is nonetheless still down 6.5% since setting a record exactly four weeks ago and is on track for a 5.9% loss this month. That would be its worst since plummeting 12.5% in March 2020, when it bottomed out after the pandemic suddenly brought the global economy to a halt.
The Dow Jones Industrial Average rose 223 points, or 0.7%, to 34,952, after erasing an earlier loss of 229 points, and the Nasdaq composite rose 2.4%.
About three-quarters of S&P 500 companies were up, with tech stocks and a mix of companies that rely on direct consumer spending driving much of the rally.
Wall Street has shaken this month as investors try to preempt a massive shift in markets, where the Federal Reserve is about to start withdrawing the huge stimulus it injected into the economy and markets. The Fed is widely expected to start raising interest rates in March, among other measures to make borrowing less easy.
But uncertainty about the precision and speed with which the Fed will act has helped cause severe swings on Wall Street, not just day-to-day but also hour-to-hour. Early morning declines in equities quickly gave way to steep afternoon losses, and vice versa. On Friday, a sudden rally in the last hour of trading managed to prevent the S&P 500 from posting its fourth consecutive weekly loss.
The heaviest losses of the month were concentrated in the parts of the stock market considered the most expensive. Much of the attention has been on high-growth tech stocks, which were absolute stars of the pandemic amid expectations they could grow regardless of the economy. S&P 500 tech stocks are down 7.9% this month, though they jumped 1.6% on Monday.
Chipaker Nvidia was up 5.39% on Monday, for example, although it remains down 18.3% for January.
Every time the Fed raises rates, the stock market has always had at least some difficulty adjusting. When bonds pay more interest, investors feel less of a need to seek out stocks and other riskier investments in search of returns. This time, the Fed is also turning off what’s colloquially known as the “money printer” it uses to buy bonds to keep long-term rates low, and it’ll likely soon remove some of those extra dollars that circulate in the economy.
The market could face an even tougher time than usual with this rate hike campaign, as the Fed will act when economic growth and corporate earnings are likely to slow, according to strategists at Morgan Stanley.
They pointed to what they see as worrying signs in U.S. manufacturing data, among other factors.
“We remain rally sellers and believe the fair value of the S&P 500 remains tactically closer to 4,000,” the strategists led by Michael Wilson wrote in a report. The S&P 500 closed Friday at 4,431.85.
Others on Wall Street aren’t so pessimistic, however. This is largely due to general expectations that corporate earnings will continue to grow. For the full year 2022, analysts expect S&P 500 earnings to rise 9.5%, according to FactSet.
Stock prices have tended to follow corporate earnings over the long term. And if earnings can continue to rise steadily, it could offset one of the traditional effects of the Fed’s interest rate hike: equity investors pay less for every dollar of corporate earnings.
“By now it should be clear that the sharp pivot in monetary policy will make this year very different from last,” wrote Solita Marcelli, chief investment officer of UBS Global Wealth Management, Americas, in a recent note. “Nevertheless, we believe investors should keep in mind that the economy remains strong, which should limit declines from current levels.”
Treasury yields climbed on Monday. The 10-year Treasury yield rose to 1.79% from 1.77% on Friday. The two-year yield, which moves more in line with expectations about what the Fed will do with short-term rates, rose from 1.15% to 1.17%.
The Fed seems entitled to act more aggressively, with inflation at its highest level in nearly 40 years and a job market that looks solid.
Investors are wondering if the Federal Reserve will raise short-term interest rates by just a quarter of a percentage point in March, the amount it usually does, or opt for a half-point hike to shake up the Marlet. They are also strengthening their expectations for the Fed rate hike during 2022.
BNP Paribas economists recently said the Fed could raise short-term rates by 1.50 percentage points this year from their near-zero record high, for example. This would translate into six increases of a quarter of a percentage point. Before that, he had planned only four increases.
On Wall Street, investors are even counting on a 9% probability of seven hikes in 2022, according to CME Group. A month ago, they only saw a 0.3% chance.
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