Rising interest rate fears and growth worries pushed the S&P 500 Index to its biggest decline in more than 14 months over last week’s holiday-shortened trading period. The Nasdaq Composite index slumped roughly 7.5%, its biggest weekly drop since the start of the pandemic. Weakness in semiconductor shares weighed on technology stocks, while weakness in automakers and home improvement retailers dragged down the consumer discretionary sector. Declines in financial giants JPMorgan Chase and Goldman Sachs took a toll on financial services shares. A more than 20% decline in Netflix shares following its fourth-quarter earnings report contributed to the losses on Friday.
Much of the week’s volatility appeared to be due to technical factors (the interplay of the metrics and psychology of the market, itself), as opposed to the fundamental health of the underlying companies within the market. Heavy flows in and out of index-focused exchange-traded funds (ETFs) indicated that many investors were trading equities as an overall asset class rather than based on the week’s earnings reports or other fundamentals. Further selling appeared to be prompted on Thursday by the Nasdaq crossing below its 200-day moving average (a “technical” threshold for some market timers) for the first time since April 2020. The declines left the Nasdaq in correction territory—down more than 10% from its mid-November highs. During times of volatility, these technical factors play a big role (albeit hidden from sight for most investors) in the direction of the markets.
Fears that the Federal Reserve will need to act aggressively to curb inflation also loomed large over sentiment. Increasing speculation on Wall Street that the Fed will announce a 50-basis point (0.50%) increase in the federal funds target rate at its March meeting, instead of the incremental 25-basis point increases that have characterized Fed action in recent years. According to CME Group data, futures markets are currently pricing in a nearly two-thirds chance of official short-term rates increasing by at least 100 basis points (1%) in 2022.
Growth forecasts weakened, even as interest rate expectations increased. The trading week began on Tuesday, with a report showing a surprise drop in factory activity in the New York region—the first since early 2020. A related gauge of activity in the mid-Atlantic region, released the following day, surprised on the upside and indicated solid expansion, however. The latest housing market data were mixed. Housing starts and permits in December surprised to the upside, while existing home sales slumped over the month. An unexpected jump in weekly jobless claims seemed to have the biggest impact on markets, with claims climbing to 286,000—the most since mid-October.
Weeks like these are the ones that often keep investors from opening their statements at the end of the month. Of course, deep down we know that there will inevitably be rough patches in our lives, just like seasons where the numbers aren’t what we hope they’d be. The weight of those tribulations around us, however, can be exacerbated the more we fixate on them. So, even if you aren’t one that shreds the statement before it leaves the envelope, take heart: “For this light momentary affliction is preparing for us an eternal weight of glory beyond all comparison, as we look not to the things that are seen but to the things that are unseen. For the things that are seen are transient, but the things that are unseen are eternal” (2 Corinthians 4:17-18).
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