With the “sharp turn” of the Federal Reserve’s monetary policy approaching, the U.S. capital market has begun to adjust. As of January 21, the three major U.S. stock indexes fell for the third straight week, with Nasdaq Composite down 7.55%, the S&P 500 falling by 5.7% and the Dow Jones Industrial Average, 4.6%. The S&P 500 and Nasdaq Composite had their worst week since March 2020; with Nasdaq falling for four straight weeks. The Dow Jones Industrial Average too had its worst week since October 2020. In addition, the FTSE World Index was down 4.2%, which is the biggest weekly decline since October last year. Stakeholders are concerned that the capital market, particularly in the United States, will reach an “inflection point” as a result of monetary tightening.
When it comes to the stock market in the United States as a whole, the decline is no longer about individual stocks. Instead, a general downward trend has emerged. Nasdaq has fallen more than 10% from its November peak, officially entering a correction range. Some market participants estimate that 40% of the Nasdaq Composite has been revised down by 50% or more. More than two-thirds of the S&P 500 were in “adjustment territory,” with 149 stocks seeing a downward trend of more than 20%. This large-scale correction means that after nearly two years of continuous rise, the U.S. stock market is at crossroads and a change in trend may occur.
The long-term yield on U.S. bonds has risen in tandem with the adjustment of the stocks, which is also why high-valued technology stocks are under pressure. Since the start of the new year, the yield on the 10-year U.S. Treasury bond has risen. It once rose above 1.9% but has recently fallen. That said, real interest rates continued to rise, briefly hitting -0.54%, the highest level since February 2020, and -1.1% at the end of 2021. Given that the U.S. stock market is undergoing periodic adjustments, ANBOUND researchers are concerned that such a development of stocks and bonds may accelerate until it reaches a bottom. The volatility of this magnitude will have a greater impact on the U.S. capital market, posing a greater risk. Morgan Stanley’s economics team has adjusted its forecast for Fed policy, predicting that its accelerated tightening will send the S&P 500 down by 10% to 20% in the first half of the year. There are warnings that the “bubble” is about to burst. On the one hand, economic growth is slowing down, and on the other hand, policy tightening is accelerating. 2022 will not be a smooth year for U.S. stocks.
As far as the reason of the adjustment in the U.S. stock market is concerned, it is generally held that the market is digesting the expectation of a “sharp turn” in the Fed’s monetary policy. Since the release of the minutes of the Fed’s meeting, the market expects the Fed to not only speed up the pace of tightening and raise interest rates ahead of schedule, but it may even consider shrinking its balance sheet at the same time. In this case, a contraction of the money increment implies a contraction of the market incremental funds, which is bound to result in a market adjustment. For the capital market, this “sharp turn” of monetary policy is the root cause of market valuation adjustments and asset allocation changes.
The reason why the Fed is eager to raise interest rates is the high inflation in the United States, which is also the dilemma facing the Fed at present. Raising interest rates and tightening policies to deal with inflation will inevitably affect the stability of the capital market. The most recent danger to the global economy is that the Fed has fallen significantly behind the curve and must take inflation seriously, according to Bank of America researchers. As previously estimated by ANBOUND, the policy risk under the decision to accelerate adjustment is the main factor that currently causes the market volatility and its downward acceleration. However, ANBOUND’s researchers believe that a series of impacts from the COVID-19 pandemic are the actual main factors behind this round of global inflation. As the pandemic itself and its spillover effects gradually weaken, there will still be no “stagflation” in this new year in the United States. It is more likely to be a process of moderate economic growth and a moderate decline in inflation after reaching an inflection point. In this case, the adjustment of the capital market should not be drastic. Even so. in general, 2022 will be a difficult year for the capital market, while the general trend of continuous rise in U.S. stocks has also changed.
Final analysis conclusion:
Changes since the beginning of the new year show that the trend of constant rise in U.S. stocks under the COVID-19 pandemic has reversed. This situation reveals information about how the capital market reacts to changes in monetary policy. If the overall monetary environment and inflation change, the general trend of the development of the U.S. stock market will shift as well.
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