Why is this a perfect storm for US stock markets in 2022?

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2021 has been a strong year for US equity markets and the S&P 500 has had its third consecutive year of double-digit returns. In terms of risk-adjusted performance, it was one of the best years with low volatility and high returns.

However, this has been kind of a perfect storm for US equity markets in 2022. While markets have been falling year-to-date, volatility has been quite high. More than the negative price movement, it is the sharp rise in volatility that seems concerning. Why are stocks so volatile in 2022 and what does the future hold?

It was a perfect storm for US stock markets

As 2022 dawned, high inflation and fears of a Fed rate hike, slowing and uneven growth and geopolitical tensions were the biggest threats. All of these risks played out in the worst possible way. US inflation hit new records and was 7.5% annualized in January. The yield on US 10-year bonds climbed above 2%, reflecting the market’s expectation that the Fed would act quickly to rein in rising prices.

Geopolitically, Russian-Ukrainian tensions have heated up. While French President Emanual Marcon said Russian President Vladimir Putin assured him that Russia would not escalate tensions, at least the White House is unconvinced. The United States has asked its citizens to leave Ukraine, a sign that the country now views Russia’s invasion of Ukraine as imminent.

As expected, energy prices soared following escalating border tensions between Ukraine and Russia. Crude oil at $100 a barrel is no longer a utopia and prices could rise further in the event of a real conflict between Ukraine and Russia.

business profits

Like every earnings season, even the Q4 2021 earnings season had its own successes and failures. According to FactSet data, 72% of S&P 500 companies reported earnings. 72% of these companies posted positive EPS surprises, which seems encouraging. However, what catches the eye is the fact that 47 companies issued negative EPS forecasts while only 17 reported positive EPS forecasts.

Notably, several companies, including Meta Platforms, PayPal, Netflix and Lyft, provided lukewarm Q1 outlook. Fears of slowing growth for the U.S. tech giants grew amid the mixed earnings season.

In recent weeks, corporate earnings have been the main driver of US stock markets. At least for this week, macro factors, including noise around rate hikes and geopolitical tensions, would boost markets.

Fed rate hike

A rate hike in March now looks like a deal almost done. What is concerning, however, is the quantum of the hike, as many observers now believe the Fed would hike 50 basis points instead of 25 basis points. St. Louis Fed President James Bullard has called for rates at 100 basis points by July. US equity markets, particularly tech stocks, sold off amid fears of aggressive Fed tightening.

Brokers also expect the Fed to hike rates multiple times in 2022 and Goldman Sachs and Bank of America now see as many as seven rate hikes in the year. Searing inflation has been a concern for Fed officials as well as the Biden administration, especially ahead of the midterm elections.

US stock markets have been quite volatile

Profits, inflation and geopolitical tensions added to volatility in US stock markets. We may see more volatility this week as the Fed meeting minutes are released this week. Stocks sold after the release of the minutes of the Fed’s December meeting. The minutes were more hawkish than expected and led to a selloff in US stock markets.

This week would also be crucial geopolitically, as we will have more clarity on Russia’s intentions amid the massive troop buildup on the border with Ukraine.

Marc Chandler, Chief Market Strategist at Bannockburn Global Forex said: “So far I would say it was all about monetary policy. This throws an additional unknown into the works. He added: “The dollar is recovering, oil prices have recovered and stocks are selling… Even if nothing happens this weekend, people will be nervous about it next week.

Analysts expect US stock markets to remain volatile this week

Patrick Palfrey, senior equity strategist at Credit Suisse, said: “I think volatility remains elevated as we essentially move from this more dovish Fed to this more hawkish Fed policy that we know.”

He added: “We haven’t decided yet how hawkish we’re going to be and until we can chart a new course for interest rate hikes with some consistency, I think volatility will remain high, and this will be more true for companies with high valuations.

US stock markets could fall

While a Russian invasion of Ukraine could pump out commodities such as aluminum and energy, US stock markets could see a selloff. “Its conceivable shares see another pullback in the mid-10.0% range as investors sell first and ask questions later. Growth and defensives are likely to outperform initially, but we believe value and cyclicals are best positioned for the global cyclical recovery,” said John Lynch, chief investment officer at Comerica Wealth Management.

Lynch advised investors to stick to their long-term investing style amid short-term equity market volatility.

Some of the stocks started to look attractive amid the US stock market correction. While the markets could fall further amid the current pessimism, it could be a good strategy to add some quality stocks to these levels.

How to buy stocks for the long term?

Over the long term, stock markets are the best asset class. While 2022 may not be as fruitful for investors as the previous three years, investors should rebalance and maintain the desired equity exposure.

For more information on stock trading, please see our selection of the best online stock brokers. If you want to trade derivatives, we have also reviewed a list of derivatives brokers you can consider.

Additionally, if you are not well equipped to research stocks or want to avoid the hassle of identifying and investing in stocks, you can choose ETFs that give you diversified exposure to different themes. .

Investing in an ETF provides returns linked to the underlying index after taking into account fees and other transaction costs. There is also a guide on how to trade ETFs.

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