Stocks ricocheted into positive territory Friday, capping a week of wild swings with the Dow closing out its best day of 2022.
The Dow Jones industrial average added 565 points, or nearly 1.7 percent, to close at 34,725.47. The S&P 500 climbed 2.4 percent, or more than 105 points, to settle at 4,431.85. The tech-heavy Nasdaq spiked 3.1 percent, or nearly 418 points, to end at 13,770.57.
Analysts describe a stock market that is bumping around in the dark as investors navigate compounding layers of uncertainty stemming from the pandemic’s ongoing threat to the economy, a standoff in Ukraine, a rush of corporate earnings reports and the Federal Reserve’s next steps.
“The market is a manic crowd that ‘reacts’ and does not think much,” said Louis Navellier, a Reno, Nev.-based stock analyst.
Even with Friday’s gains, the Nasdaq and the S&P 500 are both headed for their worst January of all time, according to Wedbush Securities. It’s also shaping up to be the S&P 500′s worst month since March 2020, and the Nasdaq’s worst since October 2008.
The biggest driver of the volatility by far, analysts say, revolves around the Federal Reserve. For years, the central bank has artificially propped up stock prices by keeping interest rates close to zero. The approach accelerated during the pandemic as an emergency bond-buying program helped fuel the market’s meteoric recovery in the second half of 2020.
But analysts say the Fed was caught flat-footed last year when the prices of gasoline, groceries, child care and other essentials shot up, financially squeezing millions of U.S. households. The central bank now has to raise interest rates to rein in inflation.
Just as consumer-facing financial supports like stimulus checks, small-business loans and enhanced unemployment insurance were scaled back last year, the investor community is now reckoning with a pullback in government support.
“Not only do we have macro stimulus from the Fed stopping, but the household programs that have supported household balance sheets … those have gone away as well,” said Rod von Lipsey of D.C.-based UBS Private Wealth Management.
“The check for all of this is coming due, and it’s coming at a time when we still haven’t beaten covid,” von Lipsey said.
On Wednesday, remarks by Fed Chair Jerome H. Powell reinforced expectations that the central bank will raise interest rates starting in March. Economists tracking the Fed’s moves believe that several more rate hikes are to come.
“The Fed has all but admitted that it is seriously behind the curve,” Bank of America economists said in a note Friday, adding that the rate-raising would probably weigh on economic growth into 2023.
The certainty of rising rates forced investors to reevaluate what they own, Navellier said in a note to investors. “The market is currently sliding down the wall of worry, searching for a new equilibrium … and trying to assess what a higher level of inflation and interest rates will do to earnings growth.”
Tech stocks, especially, have taken a beating as many of the work-from-home stars of 2020 have fallen on hard times. Peloton has plunged 82 percent in the past year, while Netflix has scaled down 28 percent. The Nasdaq index has taken a 15 percent hit in the past month and could slip even deeper into correction territory.
Stocks have had a meteoric rise since their pandemic-era lows of March 2020, “and now the Fed is crashing the tech party with inflation rising globally,” said Wedbush Managing Director Dan Ives.
He called the current climate on Wall Street a “perfect storm of selling,” while von Lipsey deemed it the “winter of discontent.” And D.C.-based investor Michael Farr says the odds of a recession are fairly high.
“Recessions are almost always correlated with a Fed [rate] hiking series, although whether this turns into a full 20 percent pullback remains to be seen,” Farr said.
Some investors say the atmosphere shows how overvalued stocks became in 2020 and 2021.
“The market is acting incoherently because investors acted incoherently, by chasing a lot of very unattractive companies that have to get taken to the woodshed,” said David Bahnsen, a Newport Beach, Calif.-based investor, adding that “shiny objects” like meme stocks, SPACs (special purpose acquisition companies) and some hot tech stocks were not supported by solid business fundamentals.
Cryptocurrencies also have plummeted. Bitcoin, which hovered below $38,000 on Friday, has shed about 40 percent of its value since its mid-November peak. Ethereum is down by a third since the start of the year.
The rotation out of tech stocks is part of a broader “de-risking” on the part of major investors, said Wayne Wicker, chief investment officer for MissionSquare Retirement.
While riskier growth-oriented stocks have taken a beating, investors have become more interested in energy stocks, which stand to benefit from elevated fuel prices. ExxonMobil shares have jumped 20 percent in the past month, while BP and Shell are up 14 percent and 15 percent, respectively.
“More value-oriented stocks in areas of energy, financials and consumer staples have fared better, suggesting that a market rotation to new leadership may be taking place,” Wicker said.
It also comes against a backdrop of generally positive economic news. The Bureau of Economic Analysis reported Thursday that the economy grew by 5.7 percent in 2021, the fastest full-year clip since 1984. The United States added an estimated 199,000 jobs in December as the unemployment rate continued to decline, while the recent surge in coronavirus cases has brought only a modest increase in the number of people seeking unemployment insurance.
The impact of inflation was palpable in new economic data released Friday. As prices increased last year, employers’ wage and benefits costs jumped 4 percent, the Labor Department reported.
Oil prices are close to seven-year highs as global energy markets react to a Russian troop buildup on the border with Ukraine. Brent crude, the global benchmark, rose above $90 a barrel this week for the first time since 2014, while West Texas Intermediate crude climbed to $88 a barrel.
Navellier, the Reno-based stock analyst, says he thinks rising energy prices could add to inflation, making for “truly horrible” announcements on inflation over the next month. He added that he thinks it will take another six weeks for the volatility to straighten itself out, if past rough patches are any indication.
In a note, he recommended that investors spend some time identifying promising investments and be ready to buy back in when the market bottoms.
“We have full employment and a post-pandemic world to look forward to,” Navellier said.