The Dow Jones industrial average took a wild ride Monday, plunging by 1,115 points before clawing its way back to positive territory, as investors grappled with the implications of a shift in Federal Reserve policy.
Monday was only the third time in 14 trading days that the Dow has closed up, since the index hit an all-time high of 36,799 on Jan. 4. Investors have been spooked by indications that Fed officials may tighten monetary policy more aggressively than originally planned to combat annual inflation running at a 40-year high.
Fed policymakers, set to begin a two-day meeting Tuesday, are expected to cease their emergency bond-buying program and begin raising interest rates in March.
The Fed’s hawkish pivot marks the end of more than a decade of central bank policy aimed at keeping prices from tumbling into an economically damaging cycle of deflation. The shift has forced investors to reassess the assets they hold, as central bank officials prepare to lift rates from near zero — and the outlines of a reshaped economy begin to emerge from the fog of the pandemic.
“The game has changed,” said Michael Lewis, Barclays’s head of U.S. stock trading. “It’s going to be a tough year. It’s going to be a tough year for people to make money.”
As global central banks turn to inflation fighting, their efforts will be less tightly coordinated than during the recession, suggesting more market upheaval, Lewis said. Investor sentiment — driven by Fed statements — has shifted quickly to mulling prospects for the Fed to raise interest rates repeatedly this year.
Analysts at Goldman Sachs warned over the weekend that the Fed could hike more than four times.
The sudden tumult swept markets that had driven stocks to historically high values relative to corporate earnings. The Dow roughly doubled in value between its March 2020 pandemic low and the beginning of this year. On Monday, investors who have reliably profited by buying whenever stocks sink rode to the rescue at least one more time.
“From 2009 to 2021, you’ve been paid to buy the dip,” Lewis said. “I don’t think you buy the dip any more.”
The Fed plans to lift rates gradually in quarter-point increments, and its overall monetary policy is likely to remain loose by historic standards for the remainder of 2022.
Stock investing in recent years has been driven by a philosophy known as TINA, an acronym that stands for “there is no alternative.” But the prospect of higher interest rates is starting to make other investments more appealing.
As investors adjust to that reality, they are fleeing the most speculative parts of the stock market first. GameStop, 2021’s notable meme stock, is down almost 60 percent from its late-November high. Over roughly the same period, the value of bitcoin, the dominant cryptocurrency, has been sliced nearly in half.
Shares in prominent technology investor Cathie Wood’s $12 billion ARK Innovation exchange-traded fund, which soared 350 percent during the pandemic’s first year, have lost more than 40 percent of their value since November.
The overhaul of investment portfolios comes as the economy is expected to slow from 2021’s blistering pace. After posting the best economic growth since 1984 last year, the United States this year is expected to grow at around 4 percent.
Most analysts say that signs of slowing activity in recent weeks, including a rise in first-time claims for unemployment benefits, represent a temporary hit from the highly infectious omicron variant of the coronavirus. By many traditional metrics, the economy remains sound. Corporate profits are at an all-time high and the jobless rate stands at 3.9 percent.
Yet the sour cocktail of imminent Fed rate hikes, persistent inflation, omicron and Russian threats against Ukraine have investors contemplating a more significant downturn. On Monday, one closely watched gauge, the IHS Markit Purchasing Managers Index, showed U.S. output growth came close to stalling in December.
“Winter is here,” Michael Wilson, Morgan Stanley’s chief equity strategist, wrote in a client note Monday.
As federal stimulus wanes this year, slowing growth will replace Fed action as investors’ top concern, Wilson wrote.
Van Hesser, chief strategist at KBRA, a bond rating agency, calls the economic shift “the Great Deceleration.” He said he expects the economy to continue growing this year above its long-run potential around 2 percent, but notes that 10 of the last 15 Fed rate-raising cycles have resulted in recessions.
“The ‘r word’ is back on people’s radars,” he said.
Markets have seen three consecutive weekly declines to kick off 2022, a sell-off that has battered all sectors and heaped losses on high-risk and speculative areas of the market such as cryptocurrencies. In addition to the Fed’s upcoming meeting this week, all eyes are on a flurry of earnings reports expected from giants such as Tesla, Apple, 3M, GE and Boeing.
Wall Street is in a “white-knuckle period” and investors are desperate for good news, according to Dan Ives, managing director of equity research at Wedbush Securities.
“It’s been a nightmare 2022 thus far for investors,” Ives told The Washington Post in an email. “Right now, risk assets including tech stocks and bitcoin are all being sold globally with nowhere to hide.”
Cryptocurrencies, which shed about $130 billion in value in a 24-hour window over the weekend, continued to swing. Bitcoin dropped to a multi-month low before reversing course Monday afternoon to pull back above $36,000. Ethereum clawed back most of its losses and was hovering near $2,385.
Those hoping for volatility to diminish in the coming days are likely to be disappointed, said Russ Mould, investment director at AJ Bell. With tensions rising around the Fed’s plans and concerns growing over a possible Russian invasion of Ukraine, volatility has more than doubled so far this year, according to Cboe’s volatility index.
“Perhaps Apple, Microsoft and Tesla can come to the rescue with some knockout numbers when they report this week,” Mould said in comments emailed to The Post. “On the other hand, a series of disappointing updates from these technology titans would only undermine sentiment further.”
Americans are wrestling with 7 percent inflation, the highest in 40 years, which has sent prices higher on everything from groceries to gasoline to home appliances. A move to raise interest rates could ease the pain but also could limit economic activity, which often hits stocks — particularly highflying companies — hard.
The spasm on Wall Street is a reflection of investors taking a more cautious outlook on economic growth for the year, said Wayne Wicker, chief investment officer at MissionSquare Retirement. Markets cratering in the early days of the pandemic made for easy year-over-year comparisons in 2021, but achieving growth under current conditions will be much more challenging.
“Markets hate uncertainty, and the confluence of higher interest rates, higher inflation and moderating earnings growth are resulting in elevated volatility at the moment,” Wicker told The Post.
Chris Larkin, E-Trade’s managing director of trading, said Monday in comments emailed to The Post that 2022′s brutal start isn’t necessarily a “reliable predictor of a down year.” Still, he said, “three-week losing streaks at the top of a year have some less-than-bullish historical connotations.”
Even oil markets, which had been bucking the negative trends of 2022, were weighed down by Monday’s sell-off. West Texas intermediate crude, the U.S. oil benchmark, fell more than 2 percent to close at $83.31. Brent crude, the international oil benchmark, declined less than 1 percent to finish at $87.12.