Explainer: Why the US Stock Market is Falling in 2022

NEW YORK, May 11 (Reuters) – The US stock market is off to a brutal start in 2022.

The S&P 500 (.SPX), which is widely considered the main benchmark for US stock market performance, fell 13.3% through April, the steepest four-month drop since 1939. The index continues to slide in May and is down 16% year-to-date as of Tuesday’s close, approaching the 20% threshold that some investors see as confirmation of a bear market.

For the Nasdaq Composite (.IXIC), which is heavier in tech stocks, the drop has been more severe, down about 25% year-to-date.

Sign up now for FREE unlimited access to Reuters.com

WHAT’S IN THE BAGS THIS YEAR?

The S&P 500 began the year more than double the lows it reached in March 2020, a rally that was reversed almost immediately when the calendar changed to 2022.

The main factor cited by investors and analysts for market weakness is the change in policy at the Federal Reserve. As the pandemic took hold, the US central bank implemented emergency policies to stabilize the economy that investors say also encouraged the purchase of stocks and other riskier assets. But in early 2022, the Fed signaled that it was adopting tighter monetary policy to contain rising inflation, a significant change in the investment environment.

WHY DID THE FED PIVOT HAMMER STOCKS?

In March, the Fed raised interest rates for the first time since 2018, raising 25 basis points. Earlier this month, the central bank raised rates by another 50 basis points, the biggest move in 22 years, with Fed Chairman Jerome Powell signaling similar hikes could follow as it also begins to unwind assets. accumulated during their fight against the effects of the pandemic. read more

Decisions have weighed on stocks in various ways. While stocks have risen during many of the Fed’s previous rate-hike cycles, some investors worry that rising inflation and skyrocketing commodity prices could force the central bank to tighten more aggressively. , which could hurt growth and push the economy into recession.

At the same time, expectations of tighter Fed policy have pushed up previously dormant bond yields. The yield on the 10-year US Treasury note has already doubled this year to 3%, the first time it has exceeded that level since late 2018, when the Fed was nearing the end of its latest tightening cycle.

With rising yields, bonds are a more competitive investment than stocks, with the 10-year Treasury yield roughly twice the level of the S&P 500 dividend yield.

Higher bond yields, in particular, dampen the appeal of technology and other high-growth sectors, which are valued for their potential cash flows and lose appeal when bond yields rise. Investors say the impact has been reflected in huge declines in some post-pandemic growth bets, with the Russell 1000 Growth Index (.RLG) down 24% this year.

WHAT ELSE COULD CONTRIBUTE TO WEAKNESS IN STOCKS?

Beyond the Fed change, Russia’s war in Ukraine has fueled further economic uncertainty. For example, the turmoil has caused a supply shock that has helped push up oil and other commodity prices, while raising particular concerns about Europe’s economy.

Other factors that have caused stock volatility recently include concerns about China’s economy. The lockdowns in the country to control COVID-19 have weighed on productive activity there.

WHAT SIGNS DO INVESTORS LOOK FOR TO STOP FALLS?

Investors would like to see signs that US inflation is peaking so that the Fed can step back from potentially more aggressive actions. Wednesday’s consumer price index release for April is the next key report to watch.

Some investors are looking at technical indicators, such as whether the S&P 500 can hold key levels, such as 4000, as well as particularly heavy days of downside volume to “take out” sellers, or the CBOE Volatility Index (.VIX) hitting certain heights.