As of 2 p.m. Eastern, the S&P 500 was 1.2% lower. The S&P 500 is still 6.5% below its record set just four weeks ago. It is currently on track to lose 5.9% this month. This would be the worst performance since March 2020 when it fell 12.5%.
After erasing a 229 point loss, the Dow Jones Industrial Average rose 211 points or 0.6% to 34,937. The Nasdaq composite was 2.4% lower.
Wall Street is shaking this month as investors attempt to anticipate a major shift in markets. The Federal Reserve is about withdraw the massive stimulus it has pumped into the economy. It is expected that the Fed will raise interest rates in March. This, along with other moves to make borrowing more difficult, is the expectation.
Wall Street has been experiencing swings not only day-today, but hourly due to uncertainty over how fast and how strongly the Fed will move. Sharp losses in the afternoon have followed sharp morning drops in stocks, and vice versa. The S&P 500 managed to avoid its fourth consecutive weekly loss on Friday thanks to a sudden rise in trading in the final hour.
The stock market's most expensive parts have suffered the largest losses. The focus has been on technology stocks that are high-growth, as they were the stars of the pandemic and have the potential to grow regardless of economic conditions. The S&P 500 tech stocks are down 8%, but they jumped 1.6% Monday.
Chipaker Nvidia's Monday gain was 4.9%, but it is still down 18.5% for January.
The stock market is able to adjust when the Fed raises its rates. Investors feel less inclined to invest in stocks or other riskier investments to get returns if bonds pay higher interest rates. The Fed will soon stop using what is commonly known as the "money printer" to buy bonds in order to lower longer-term rates.
This rate-hike campaign may make it more difficult for the market than usual. The Fed will be moving when economic growth and corporate earnings are slowing, according to strategists at Morgan Stanley.
They cited, among other things, worrying signs in U.S. manufacturing data.
The report by Michael Wilson, a strategist, stated that "we remain sellers of rallies" and that the fair value of S&P 500 tactically remains closer to 4,000. Friday's close of the S&P 500 was at 4,431.85.
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However, Wall Street isn't all as pessimistic. This is due in large part to the expectation that corporate profits will continue growing. According to FactSet, analysts predict that S&P 500 earnings for the entire year 2022 will increase 9.5%.
Over the long-term, stock prices have been able to track corporate profits. If profits continue to grow steadily, this could offset one of the traditional effects brought on by higher interest rates from the Fed: Stock investors paying less per $1 of corporate earnings.
Solita Marcelli (UBS Global Wealth Management's chief investor officer for Americas), wrote that "By now it should have been clear that the strong pivotal in monetary policy will cause this year to be very different from last." We believe investors shouldn't lose sight of the fact the economy is strong. This should limit any downside from current levels.
On Monday, Treasury yields rose. The 10-year Treasury yield rose to 1.78%, from 1.77% on Friday. The yield on the two-year Treasury rose to 1.16 percent from 1.15%. This is a result of expectations about Fed's short-term rate policy.
With inflation at its highest point in almost 40 years, and the economy looking strong, it seems that the Fed has more freedom to be aggressive.
Investors are speculating on whether the Federal Reserve will increase short-term interest rates by a quarter of an average percentage point in March or if it will hike them by half a point to shock the market. Investors are also speculating on how much the Fed will raise rates in 2022.
BNP Paribas economists recently stated that the Fed could raise short-term rates by 1.50 percent this year, up from their record low of almost zero. This would mean six increases of one quarter percent. It had previously forecasted only four increases.
CME Group reports that Wall Street investors have begun to price in a 9 percent chance of seven increases in 2022. They only saw a 0.3% chance of this a month ago.