Forward in fear

The reasons behind the stockmarket turmoil

From Fed tightening to rising wage costs, investors see gloomy prospects ahead

As the stock-trading screens turned red, one trader was heard to quip that at least some things are falling in price. By the market close on Wednesday, January 26th, the cumulative loss on the S&P 500 index had moved towards 10% for this year, barely four weeks in. The year-to-date decline in the NASDAQ Composite, a tech-heavy index, is well into the double digits. The message from the Federal Reserve, which concluded its scheduled policy meeting on the 26th, is that interest rates must rise soon to tackle high inflation. It has been a rocky start to 2022 for investors.

The day-to-day numbers for the broad indices do not do full justice to the jumpiness of markets. Much of the drama has been beneath the surface, at the stock or industry level. Technology shares in particular have fared badly. The FTSE 100 index of British stocks, which is light on technology and heavy on oil and commodity firms, has been more resilient than American indices (see chart 1). Prices have swung wildly during each trading day. On Monday, for instance, trading began in New York with a big sell-off, which then intensified. At one point the NASDAQ was down by almost 5%. Then stocks suddenly rallied. The NASDAQ finished the day up by 0.6%. On Tuesday share prices fell again. On Wednesday the S&P 500 had posted a handsome increase before Jerome Powell, the Fed’s chairman, gave his press conference. By the time he had finished speaking, it was in the red.

Behind all the minute-to-minute lurches is a market that is somewhat forward-looking. And what has the market now to look forward to? Quite a lot of trouble, it would seem. In six months’ time, the easy money that has supported stock prices for so long will be firmly on the way out. The economy will be weaker. Corporate profits will be feeling the squeeze from decelerating revenue growth and from rising wage costs. There are, in short, more reasons for alarm than hope. No wonder markets are so jittery.