The stock futures of major indices including the S&P 500, NASDAQ 100, and Dow Jones have edged marginally higher in overnight trading on Sunday. However, the month of January 2022 has been a miserable one for stock market investors.
In fact, the S&P 500 is all set to experience its worst month since the pandemic-fueled crisis sent stocks lower in March 2020. The primary reasons for the ongoing pullback can be attributed to a multitude of factors that include inflation, supply chain disruptions, and the threat of multiple interest rates hikes.
The S&P 500 Index is down 7% this month while the tech-heavy NASDAQ has already entered correction territory, and maybe headed for its worst month ever since October 2008. Additionally, the small-cap benchmark Russell 2000 Index is in a bear market which means it has declined by more than 20% from all-time highs.
The Federal Reserve decreased interest rates and pumped in billions of dollars to shore up the economy and boost consumer spending in the last two years. As interest rates were near all-time lows, companies managed to improve earnings at a rapid pace.
However, it also resulted in excess money supply which pushed inflation rates higher. As companies are also impacted by a difficult supply-chain environment, product prices are expected to move up, making equity markets all the more volatile.
What next for stock market investors?
Around 77% of companies that reported earnings have surpassed consensus estimates in Q4 of 2021. This is 16% below the average in the last four quarters. The wild swings in stock prices should be expected going forward as investors adjust to the shift in monetary policy and earnings.
Historical data suggests the average length of time between a decline of over 5% for the S&P 500 Index is 104 days. However, in 2021, the Index went for 293 days before pulling back by 5% last September.
When the equity markets are rangebound, investors leverage futures and options to hedge against lower volatility. As volatility surges, investors also change strategies which exacerbates market movements. Basically, investors are expected to hedge for a wider range of volatility but intraday moves will remain elevated in the upcoming months.
The S&P 500 Index traded below its 200-day moving average last Friday which is viewed as an important momentum indicator by technical analysts. So, if it continues to trade below this metric for a sustained period, it might result in a significant downside in upcoming trading sessions.
In an interview with CNBC, Darrell Cronk, chief investment officer for wealth and investment management at Wells Fargo, explained, “History is very clear on this point, when you breach the 200-day moving average with conviction, like we did ... regardless of what causes that breach, typically what happens is you get a big swoop down 10%, 12%, 15%, which is what we got.”
Another important metric that will impact the S&P 500 Index is the 10-year Treasury yield, a benchmark that influences lending rates including mortgages. The Treasury yield is currently 1.78%, just below its 52-week high. An increase in the 10-year yield may drive forward price-to-earnings ratios of major indices lower in the next few months.
Major S&P 500 companies will report earnings this week
Blue-chip stocks such as Alphabet (NASDAQ: GOOG), Amazon (NASDAQ: AMZN), Exxon Mobil (NYSE: XOM), Ford (NYSE: F) Merck (NYSE: MRK), and General Motors (NYSE: GM) are scheduled to report their earnings this week. There will also be macro-economic data such as the January employment report, as well as the manufacturing and services data that will be released this week.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
