Why the Stock Market Dropped—and Why It Finished Higher

Now that’s a stock market turnaround.

Fears of tighter monetary policy from the Federal Reserve, a military conflict in Russia, and simply being on the wrong side of the trade, had stoked panic in the stock market early Monday. Then, investors bought the dip.

The


S&P 500

rose 0.3% after falling nearly 4% at one point during the day. The index is now down 8% from its all-time high set on Jan. 3, but avoided closing in correction territory, the term for a drop of 10% from a high.

Panic was the name of the game, as the drops sent Wall Street’s “fear gauge,” the Cboe Volatility Index (VIX), up as high as 38.94, the highest since October 2020, before it pulled back to 29.90.

Not to be left out, the


Dow Jones Industrial Average

rose 101 points, or 0.3%, erasing earlier declines of more than 1,000 points. It’s down some 7% from its all-time high set on Jan. 4, while the


Nasdaq Composite

gained 0.6%. The tech-heavy index fell into a correction last week and is now down more than 14% from its recent high.

The biggest gain of the day was in the


Russell 2000 index

of small-cap stocks, which briefly entered bear market territory Monday before posting a gain of 2% Monday.

If anything was responsible for the drop, it’s the sense that the Federal Reserve, which will release its interest-rate decision on Wednesday, is ready to slam the brakes on growth in the US to tame inflation. Traders expect four interest rates hikes in 2022, which the Fed would implement to curb inflation, a move that could choke off economic growth. Plus, bond yields have risen this year, partially a response to the Fed ending its bond-buying program. That makes future profits less valuable, causing valuations to decline, especially for tech and growth stocks.

“The primary damage is a compression of valuing the earnings, in the face of potentially higher interest rates as central banks tighten monetary support to address inflation,” wrote Louis Navellier, founder of Navellier & Associates.

That brings the Fed into focus this week. The central bank will make a decision on interest rates this Wednesday. Although markets don’t expect a rate hike until March, investors will be watching the bank’s statement to see if a March hike is now more or less likely—and whether the Fed will slam on the brakes to slow inflation.

That seems unlikely, says Mizuho economist Alex Pelle. He notes that much of the economic data since the last FOMC meeting have disappointed. Its been even worse recently, with the Citi Economic Index dropping from -2.9tp -22.1 since the Fed entered its quiet period.

“Overall, we expect markets will be able to breathe a sigh of relief following Powell’s postmeeting press conference,” Pelle writes. “In our view, the risk of a hawkish surprise—one that is not already discounted by markets—is low.”

Adding to the concerns: the possibility of tensions on the border of Russia and Ukraine leading to military aggression. The North Atlantic Treaty Organization is sending ships and jet fighters to Eastern Europe in response to Russia’s military buildup near Ukraine. The European Union also plans to provide loans and grants totaling more than $1 billion to Ukraine.

“Investors appear to be concerned about the timing and pace of monetary policy tightening, the persistence of inflation, and profit margin pressure,” writes Keith Lerner, chief market strategist at Trustee Advisory Services.” And now we can add building geopolitical tensions surrounding Russia and Ukraine.”

Still, if Ukraine and Russia were really an issue, in the commodity space, crude prices were falling. Futures contracts for West Texas Intermediate fell 1.3% to under $84 a barrel.

Before the market rebounded Monday, it sure did feel like a stock market bubble had popped. Last week, the three major indexes suffered their worst weeks since 2020. The stock market has been concerned about a tighter monetary policy. The S&P 500 has had an impressive run—it’s up 92% from its bear market bottom set in March 2020—as investors had enjoyed a Federal Reserve that was insistent on supporting the economy and markets. After Monday’s rebound that is up in the air.

Don’t get too comfortable yet. At 4,410, the S&P 500 still hasn’t risen back to its 200-day moving average. This indicates market participants still aren’t fully comfortable buying stocks at prices consistent with their longer-term trends.

Earnings might help determine which way the market is heading. Within the next two weeks, Apple (ticker: AAPL), Amazon.com (AMZN), Microsoft (MSFT), Alphabet (GOOGL), and Tesla (TSLA) will report earnings. If those stocks post large moves on earnings, they will move the S&P 500 and Nasdaq in one direction or the other, as those stocks are worth a combined several trillion dollars.

Cryptocurrencies were initially deeper into the red before rebounding, too. Bitcoin, the leading digital asset, was trading above $43,000 last Thursday, according to data from CoinDesk, and had since fallen to below $35,000. It was down almost 4% Monday, before ending the day up 2%. It was worse for smaller peer Ether, which was down almost 8%, before it ended the day up 3.7%.

Here are six stocks on the move Monday:

Kohl’s (KSS) shot up 36% following a spate of news reports, including from Reuters, which cited anonymous sources, that the retailer may soon receive a second takeover offer. That has sent shares of


Macy’s
(M)


Nordstrom
(JWN) up 18% and 13%, respectively.

Unilever (UL) lifted 8.6% following a report from the Financial Times, citing anonymous sources, which said activist hedge fund Trian Partners had built a stake in the consumer goods giant.

Snap (SNAP) stock fell 1% after getting downgraded to Neutral from Outperform at Wedbush.

Netflix (NFLX) stock declined 2.6% after falling 22% Friday on a dim subscriber growth outlook. Monday, the stock was downgraded to Hold from Buy at Jefferies.

Write to Jacob Sonenshine at [email protected] and Jack Denton at [email protected]

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