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U.S. stocks end January on high note but still chalk up worst month since March 2020

The S&P ends the month 5.3% lower, while the Nasdaq shed 9% and the Dow 3.3%

Brian Fairbrother works on the floor of the New York Stock Exchange on Jan. 28. (Allie Joseph/NYSE/AP)

The stock market mounted a much-needed comeback Monday as investors closed out its worst month since March 2020, and the Dow staged yet another reversal to close more than 400 points higher.

Wall Street loathes uncertainty, and the first month of 2022 was threat-studded and unpredictable as investors assessed what the Federal Reserve had in store for rate hikes and historically high inflation, the pandemic’s grip over the economy, a tangle of rising geopolitical tensions and a global supply chain in deep distress. Corporate earnings — including blowout performances from Apple and Microsoft — have thus far failed to impress. Wall Street’s fear gauge, the Cboe Volatility Index, is up 75 percent year-to-date.

“This is a ‘Game of Thrones’ market between the bulls and the bears, and so far the bears are winning,” said Dan Ives, managing director of equity research at Wedbush Securities.

The S&P 500 swelled 1.9 percent, or nearly 84 points, to end the session at 4,515.55. While that shaved its January losses to just less than 5.3 percent, it still marked the broad U.S. stock index’s worst monthly performance since the coronavirus pandemic took hold in March 2020.

The tech-heavy Nasdaq soared 3.4 percent, or just over 469 points, to settle at 14,239.88. But it ended the month nearly 9 percent lower than it started.

The Dow Jones industrial average added over 406 points, or 1.2 percent, to close at 35,131.86. On Friday, the blue-chip index had notched a late-session comeback to cap a dizzying week that saw some intraday swings of 1,000 points, and the back-to-back gains shaved its monthly loss to 3.3 percent.

January has been a nightmare for investors. Here’s what Wall Street is watching.

The biggest driver of the volatility by far, analysts say, revolves around the Fed. 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.

Meanwhile, Americans are wrestling with the highest inflation 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.

Now, markets are pricing in a handful of rate increases throughout the year as the central bank moves into a more hawkish phase of monetary policy. At the Fed’s first meeting of 2022, last week, Chair Jerome H. Powell did not specify how many times the Fed will raise rates but said that the central bank would have to be “nimble” and “humble” in how it responds to data that unfolds during the year, given how quickly the economy can change.

Matt Stucky, senior portfolio manager at Northwestern Mutual Wealth Management Co., said he thinks inflation will normalize in the next year or two. But until then, the market environment is likely to see “persistent heightened levels of volatility,” Stucky said, citing pressure from supply chain constraints, the pandemic and the pending rate hikes.

“These market head winds are offsetting continued strength in corporate earnings along with a healthy U.S. consumer,” Stucky said in an email.

The schism between investors who fear that the Fed’s action will slow growth and those who believe it will help to moderate inflation and boost companies’ bottom lines are “at the heart of gyrations in the market” so far in 2022, said Wayne Wicker, chief investment officer at MissionSquare Retirement.

To bullish investors, volatility is delivering a chance to take advantage of significant price reductions, especially in hard-hit and pricey sectors such as tech, Wicker said. But the specter of slowing growth — from the omicron variant of the coronavirus, Fed intervention and tougher year-over-year comparisons — is worrying many.

In this “white-knuckle environment,” Ives said, investors are looking to earnings from the hundreds of companies reporting this week, including giants such as Facebook, Google and Amazon, for more crumbs of good news, making this the “most important earnings season in a decade for the tech sector.”

Last week, Apple and Microsoft’s robust earnings reports were among the only bright spots for tech traders, with CEOs delivering optimistic outlooks despite supply chain disruptions, staffing shortages and other pandemic-related issues.

“Sentiment is slowly changing in the tech sector, which speaks to why strong tech earnings this week are a linchpin to stocks going higher or staying in the red during this Fed rising rate backdrop,” Ives said in an email.

It’s also a jam-packed week for economic data, with investors hungry for insight into how the economy is faring as the omicron variant’s surge spurs staffing shortages and supply chain struggles continue. Reports on separations — which have been hovering near record highs for months as businesses struggle to hold on to workers — as well as private payrolls and December jobs will offer some clarity on labor market conditions. The economy grew 5.7 percent in 2021, the fastest full-year clip since 1984, but labor market tightness and the pandemic’s ceaseless threats will make achieving further growth tougher in the current environment. The GDP news also helped to fuel the market comeback late last week, putting a rosy end on an otherwise vertigo-inducing trading period.

Oil markets have continued to buck the grim trends of 2022, bolstered by steady production and the upward pressures of tensions in the Middle East and between Russia and Ukraine. West Texas intermediate, the U.S. oil benchmark, climbed more than 1.5 percent Monday to trade above $88 as Russia and the United States clashed over the Ukraine situation during a U.N. meeting. Brent crude, the U.S. oil benchmark, fluctuated but moved 0.2 percent higher, to trade around $89.50.