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Will the stock market continue to fall throughout 2022?

 


Business chart with red down arrow and dollars background.  Waste of money.  Stock market crash 3d illustration.

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The new year opened with all three major stock indices in the United States hitting new all-time highs.

The Dow Jones Industrial Index hit a new high on Jan. 4, but since then the stock market has been falling.

The question is, will the stock market continue to fall throughout the year, never returning to opening day highs?

For the second week in a row, the stock market ended up falling, again with the Federal Reserve dominating the news.

Oh, analysts tried to distract investors from their focus on the Federal Reserve by touting the upcoming earnings season and how strong it was going to be. They looked specifically at the large commercial banks which they believed would lead the procession of good news.

But things didn’t quite go as planned.

First, there was news on Wednesday that the consumer price index for December was 7.0% higher than it was a year ago.

On Thursday, Fed board member Lael Brainard was scheduled to testify before a congressional committee regarding her nomination as the new vice chair of the Fed’s Board of Governors, and she had to make a strong statement that the Fed was going to have a good fight against inflation in the months to come.

Then came Friday and the earnings results from the major commercial banks.

The best word heard about these gains?

Dull.

The leader, JPMorgan Chase & Co. (NYSE: JPM). Quarterly earnings show a double-digit percentage. JPMorgan shares fell $10.34 or 6.1%.

Same at Citigroup (NYSE:C). Citigroup closed 85 cents or 1.3%.

Not all bank reports were like that. Wells Fargo (NYSE: WFC) reported earnings up 86% in the fourth quarter of 2021 and its share price rose $2.06 or 3.7%.

But the spell was broken.

And then there was news on retail sales (weak) and manufacturing data (weak), and that sort of thing sealed the story for the end of the week.

Chart NASDAQ, S&P 500, Dow Industrials

Stock market performance

the wall street journal

And, with the exception of the slight rise at the end of the day, the market closed for the week.

The Fed faces a dilemma

The stock market is bathed in radical uncertainty these days.

Investors don’t even know what all the possible outcomes are to consider.

And the Federal Reserve is not helping the situation in the way it has handled things.

One place where we see this concern is in the movement of the value of the US dollar.

On Jan. 3, after new stock market highs at the start of the year, the value of the US dollar was 96.30, according to the US Dollar Index (DXY).

The index fell to 94.87 on Thursday, before closing Friday at 95.15.

The sentiment in the forex market is that Fed Chairman Jerome Powell and the Federal Reserve are not handling the inflation picture very well and traders have been selling the dollar so far in the new year.

It has also been the case that global money is leaving areas that have negative bond yields. As a result, markets around the world that had returns on government securities in negative territory are seeing those returns now rising towards zero and/or positive returns. In particular, in the United States, Treasury Inflation-Protected Securities (TIPS), whose yields have been in negative territory for about three years, are now heading into positive territory. The amount of money leaving these markets has been quite significant.

This is also reflected in the rise in nominal rates in the United States. The yield on the US 10-year Treasury note was around 1.50% on January 31, 2021.

On Friday, January 14, 2022, the yield was slightly lower at 1.80%.

The basic story behind these moves is that the Federal Reserve will oversee interest rate hikes this year, but investors are worried about what exactly the Federal Reserve will do.

It is certain, right now, that the Federal Reserve will raise its key interest rate this year, three or four times, depending on who you listen to.

But the Fed has said little or nothing about whether or not it will have to sell securities, outright, to reduce all the liquidity that exists in financial markets and the commercial banking system.

The Fed has acquired several trillions of securities to add to its portfolio over the past two years or so. Will the Fed start selling securities now to support the hike in its key interest rate?

Who knows?

Investor Focus

And that brings us back to the investor.

Hugh Gimber, strategist at JP Morgan Asset Management, says:

“Stock markets will continue to take inspiration from the bond market.”

“What is becoming clear is that the Fed realizes that inflationary pressures are larger and more widespread than they had previously anticipated.”

In other words, expect bond yields to rise.

I have stated elsewhere that I believe the yield on the 10-year US Treasury will rise to at least 2.5% this year.

If I’m right, I think you can imagine the US stock market was lower on December 31, 2022 than it was on January 3, 2022. Enough said.

Sources

1/ https://Google.com/

2/ https://seekingalpha.com/article/4479883-stock-market-down-year

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