That’s why stocks are on such shaky ground at the start of January

It was a wild day for stocks on Monday, contributing to the market’s shaky start to 2022.

The Dow Jones Industrial Average fell as much as 1,000 points before closing about 100 points higher. The S&P 500 was down nearly 4% from its session low, but managed to post a small gain. The Nasdaq Composite rose 0.6% after falling as much as 4.9%.

Despite the late-day jumps, both the Dow and S&P 500 are on track for their worst month since March 2020, when the market went into turmoil amid the pandemic. The Nasdaq, meanwhile, is still heading for its biggest monthly loss since October 2008.

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What is behind the market’s weak start to the year?

Although some areas of the market that were perceived as expensive or more speculative began to struggle in November, the broader market took a big step back in the first week of January after the Federal Reserve increasingly indicated that the central bank would take aggressive action to stop it to curb the rise in consumer prices.

“Over the past month, the Federal Reserve (Fed) has made it increasingly clear that it is serious about fighting this inflation,” the Wells Fargo Investment Institute said in a Jan. 19 note to clients.

The central bank has signaled that it intends to halt asset purchases, hike interest rates and potentially reduce its balance sheet from March. Treasury yields have skyrocketed in preparation for rate hikes, with US 10-year Treasuries up more than 40 basis points this year alone to peak at nearly 1.9% after trading just above 1. 5% had finished. (1 basis point equals 0.01%).

Investors are now expecting four rate hikes this year, with some officials warning that more may be needed after most Wall Street pros expected just one or two hikes a few months ago.

“The December 15 minutes that came out on Jan. 5 came as a shock to investors,” Ed Yardeni, founder of Yardeni Research, told CNBC’s Halftime Report Monday.

The Fed will publish its latest update on Wednesday. Although interest rates are unlikely to be hiked at the meeting, market experts believe the central bank will stick to its plan to tighten funding conditions despite the market decline amid high inflation.

Concerns over persistent inflation, supply chain disruptions from new Covid variants and the potential for conflict in Ukraine are other factors that have weighed on investors’ risk appetite.

Tech leads the way down

Tech stocks with high valuations were hit first and will continue to be hit.

Last week, the tech-heavy Nasdaq Composite fell into correction territory, marking a 10% decline from its record close in November 2021. At one point on Monday, the index was just a few percentage points away from entering a bear market.

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Rising bond yields typically penalize growth stocks disproportionately because their future earnings growth becomes less attractive as interest rates rise. Growth expectations for tech stocks have also softened as Wall Street analysts got a better sense of what the economy could look like post-pandemic.

“Since End of Third Quarter 21, 2022 Earnings Estimates for [the Nasdaq 100] fell 0.8% while estimates for the S&P 500 rose 1.9%, pointing to weaker fundamentals for growth stocks relative to the overall market,” said Savita Subramanian, equity and quant strategist at Bank of America, in a message on Monday.

Many of the biggest stocks on the market are tech names, so their declines can have a big impact on the market average. Selling pressure is now feeding itself as investors dump risk assets and pull down every stock sector except energy in January.

The cryptocurrency market has also been hit hard. Bitcoin price briefly fell below $34,000 on Monday morning, bringing its year-to-date losses to around 30%. Since its record high in November, the largest cryptocurrency has lost around 50%.

Ethereum’s price has seen a similar drop during this period.

bright spots

Certainly, the health of the economy is looking good. The unemployment rate fell to 3.9% after a record year of non-farm payrolls growth. Other economic growth metrics are positive, albeit showing a slower recovery than 2021.

Despite some disappointing reports from high profile companies, the earnings season is also proving strong. According to FactSet, more than 74% of S&P 500 companies that have reported results have beaten Wall Street’s earnings expectations.

Covid-19 cases are also declining. After Covid-19 cases exploded to staggering new heights amid the spread of the highly transmissible Omicron variant, cases of Covid-19 have been surging in New York state over the past two weeks, according to Governor Kathy Hochul, raising hopes for other areas of the USA made sees a similarly fast wave.

-Michael Bloom of CNBC contributed to this report.