Stocks posted large gains 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 of impending interest rate hikes. only make everything more difficult in the markets.
The S&P 500 rallied from an early decline to close 1.9% higher. Despite this, the benchmark fell 5.3% in January, its worst month since plunging 12.5% in March 2020, when it bottomed out after the pandemic suddenly brought the economy to a halt. world.
The Dow Jones Industrial Average rose 1.2% and the Nasdaq composite climbed 3.4%, its biggest one-day gain since early November 2020. Both also ended in the red for January, with the Dow losing 3.3% and the Nasdaq losing 9%.
Wall Street has been rattled this month as investors try to get ahead of a strategic pivot from the Federal Reserve, which is about to start withdrawing the huge stimulus it injected into the economy and markets. Investors expect the Fed to start raising interest rates in March, among other moves to make borrowing less easy.
But uncertainty about the extent and speed with which the Fed will act has helped cause serious swings on Wall Street. 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 straight weekly loss. On Monday, the index reversed an early decline of 0.4%.
“There is systematic buying at the end of a very bad month like January, and that has certainly taken place over the past two days,” said Scott Lander, chief investment officer at Horizon Investments.
The S&P 500 rose 83.70 points to 4,515.55. The Dow Jones gained 406.39 points to 35,131.86, after erasing an earlier loss of 229 points. The Nasdaq gained 469.31 points to 14,239.88.
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 technology stocks rose 2.7% on Monday. The sector ended the month down 6.9%. The monthly decline was much deeper for tech stocks like chipmaker Nvidia, which jumped 7.2% on Monday but posted a 16.7% slippage for January.
The stock market has always had at least some difficulty adjusting to higher rates. 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 are not so pessimistic. 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.”
The 10-year Treasury yield rose to 1.78% 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 to 1.18% from 1.15%.
The Fed seems entitled to act more aggressively, with inflation at its highest level in almost 40 years and a job market that looks solid.
Investors are wondering whether the Fed will raise short-term interest rates by just a quarter of a percentage point in March, the amount it usually does, or by half a point. 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 result in six increases of a quarter of a percentage point. Before that, he had planned only four increases.
AP Business Writer Joe McDonald contributed.