The reason behind the instability in the stock market

AS stock-trading The screen turned red, a trader was heard to sneer that at least some things were falling in price. The market closed on Wednesday, January 26th, with increasing losses S.AndP The 500 index has moved to 10% for this year, in just four weeks. Nasdaq The composite, a technology-heavy index, is in double digits. The message from the Federal Reserve, which concludes its scheduled policy meeting on the 26th, is that interest rates will have to rise soon to deal with high inflation. It got off to a rocky start in 2022 for investors.

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Daily numbers for broad indicators do not do full justice to market surges. Much of the drama has been on the surface, in stock or on the art stage. Technology stocks in particular have deteriorated. The FTSE The 100 index of British stocks, which is lighter in technology and heavier on oil and commodity firms, is more resilient than American indicators (see Chart 1). Prices have swung widely every trading day. On Monday, for example, the business started with a big sale in New York, which then intensified. At one stage Nasdaq Decreased by about 5%. Then suddenly the stock rises. The Nasdaq Day ended by 0.6%. Share prices fell again on Tuesday. Wednesday S.AndP Fed Chairman Jerome Powell posted a handsome increase of 500 before giving his press conference. By the time he finished speaking, it had turned red.

Behind all the minute-to-minute hideouts is a market that is a bit on the front side. And what is the market waiting for now? Quite a problem, I think. In six months, the simple money that has been supporting stock prices for so long will come out strongly. The economy will weaken. Corporate profits will feel the pressure from declining revenue growth and rising wage costs. In short, there are more reasons for apprehension than hope. No wonder the markets are so volatile.

Start with the Fed, which is never far from the minds of investors. After spending most of 2021 in an immediate need for tighter money, the Fed has abruptly changed its tone. At its monetary-policy meeting in December, it heard another hackneyed note. The minutes of the meeting, published on January 5, made it clear to investors that rates would rise soon. The causes of the volt face are straightforward. Inflation is uncomfortably high. It can no longer be dismissed as transient. And the labor market is rapidly running out of workers. Speaking on the 26th, Mr Powell emphasized the risk of price stability and did not rule out the idea of ​​a quick series of interest rate hikes. The next Fed meeting on March 15-16 is expected to see a 0.25% rate hike.

In response to the change of tone, markets have set prices more quickly in policy negotiations. Long-term real interest rates have risen sharply. Yield of ten-year Treasury inflation-protected securities (Advice), Which was about -1% at the beginning of the year, is now close to -0.5%. Stock markets had to adjust. Higher long-term rates depreciate the current value of future corporate cash flows, making stocks less valuable. The impact is particularly pronounced on shares of technology companies, which set the price for long-term profit growth in the future. So is violence NasdaqIts fall.

The Fed is not the only concern. Most of the market last year was forecast on strong economies and handsome revenues and profits. Unusual growth in the U.S. was fueled by low interest rates, unprepared demand and bumper কাল 1.9trn fiscal-stimulus packages. These emotions are fading. On January 25th IMF For cut his forecast GDP The U.S. grew 1.2 percentage points to 4% for 2022, as part of its generally worse outlook on the world economy. There are already indications that a sharp slowdown is underway. According to the latest survey by Purchasing Managers, activity in the service industries in the US has dropped to an 18-month low. Retail sales fell in December. Consumer confidence is low. Some of these Omicron can be lowered. But the fear is that it also reflects the ebb and flow of underlying demand.

As investors consider the demand outlook for the coming months, much less to excite them. Profits will be suppressed by a slow economy, and thus by slowing revenues, but also by rising costs. The high price of the product adds to the bill of raw materials. A big headache is labor. The tight job market is raising the wages of scarce workers. “Wage inflation is everywhere,” Goldman Sachs boss David Solomon lamented, urging investors last week. His bank had just reported a blowout year for profit, but last year Goldman’s one-third increase in wage bills upset investors’ nerves. Other businesses that rely more on brain power than physical capital will feel the pinch – shares of technology, another reason new companies come under pressure to sell.

The third concern is evaluation. American stocks look terribly expensive. A measure popularized by Robert Schiller of Yale University adjusted the stock price of America 36 times higher than their earnings, for the business cycle. This is more than read before the 1929 crash (although less than the assessment reached during the dot com boom of the late 1990s). An account for a particularly expensive looking, unproven business seemed like a long time ago. ARK Innovation, an exchange-traded fund that invests in young tech firms, has been shortlisted for a more predictable end to the market. It has dropped more than 50% from its peak. There is skepticism about well-known names like Netflix and Zoom, which have done well from the home economy, but have recently suffered. Investors are still taking refuge in unpleasant oil stocks, which provide protection against inflation, such as ExxonMobil (see Chart 2). “In short,” notes Michael Wilson, a banker at Morgan Stanley, “there is a growth coming out of an equity market that has expanded a lot in terms of valuations.”

Can anything improve the mood of the market? There is some good news that investors may finally get hold of. Omicron could prove to be the final wave of the epidemic; Its effects can be transient. As it fades, there may be a labor barrier behind the recent inflation. There are temporary signs that China’s economy is sinking. The IIts “next generation” fund, which will distribute € 750bn ($ 880bn) to member states, still has a lot of financial fuel in the tank. Although much good news comes from outside America. It may not be much Nasdaq. And it’s hard to feel bullish about Europe with the gathering of Russian troops on the Ukrainian border.

Investors expected a lower hockey tone from Mr Powell for a hefty loss. Instead, he thinks consumers are more concerned about rising prices than falling share prices. A volatile stockmarket should not be a first-order concern for policymakers. A market correction may even be in line with the Fed’s intentions, if it returns people to retire before their share-price gains. If the corporate-bond market goes bad, the Fed will have more reason to be concerned, as it is vital for funding. But so far the corporate-bond spread has been stable. It is the stock price that is skipping. And it’s hard to see change soon. 3

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This article was published in the print edition of Finance and Economics under the heading “Forward in Fear”

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