The stock market fell for a fourth day in a row on Friday, and so far in January the S&P 500 is off to its worst start since 2016 The tech sector has been hit particularly hard, with the index dropping more than 10 percent from its most recent high, which qualifies as a correction in Wall Street talk.
That isn't the only thing. The bond market is in disarray, with rates rising and bond prices falling. Supply chain disruptions continue as inflation is red hot.
The markets looked past such issues during the Pandemic and saw big increases in the value of all kinds of assets.
Some market watchers worry that the recent decline may be consequential because a crucial factor has changed. The Federal Reserve is that element.
The Fed is returning to higher interest rates as the economy appears to be stabilizing. It is beginning to withdraw some of the other forms of support that have kept the stock market afloat.
It could be a good thing if it beats inflation. As investors move money around, they look for assets that perform better when interest rates are high.
Edward Yardeni, an independent Wall Street economist, said that the current bull market started because of the Fed's policies. I don't think they will end it all now, but the environment is changing and the Fed is responsible for a lot of this.
The central bank tightened monetary policy because it worked. It helped spur economic growth by keeping short-term interest rates low.
The rapid rise in prices of commodities, like food and energy, and financial assets, like stocks, bonds, homes, and even cryptocurrencies, is a result of this flood of easy money.
What happens next comes from an established pattern. William McChesney Martin, a former Fed chairman, said in 1955 that the central bank was acting as the adult in the room when it ordered the punch bowl removed.
The Fed's December policy meeting minutes revealed that they were on the verge of embracing a tighter monetary policy. New data showed that inflation was at its highest level in 40 years.
The Fed would have no choice but to act to curb rising prices. The stock market began to decline.
Financial markets expect the Fed to raise its key interest rate at least three times this year and begin to shrink its balance sheet as soon as this spring. The level of bond buying has been reduced. Market strategists will be watching the Fed policymakers meet next week to decide on their next steps.
Tech stocks were particularly appealing because of low interest rates. The S&P 500 information technology sector, which includes Apple and Microsoft, has risen 54 percent on an annual basis since the market bottomed in March 2020. Low interest rates amplify the value of the expected future returns of growth oriented companies. If rates go up, this can change quickly.
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What is inflation? Your dollar will not go as far tomorrow as it did today because of inflation. The change in prices for everyday goods and services is known as the annual change in prices.
What causes inflation? It could be due to increased consumer demand. Some developments, such as limited oil production and supply chain problems, can cause inflation to rise and fall.
Is inflation bad? It depends on the situation. Moderate price gains could lead to higher wages and job growth.
Can inflation affect the stock market? Trouble for stocks is usually caused by rapid inflation. During inflation booms, financial assets have been bad, while tangible assets have held their value better.
Technology has been the worst performing sector in the S&P 500 this year. It has fallen more than 11 percent since its peak.
Energy, financial services and consumer staple are the three best-performing sectors in the early days of the S&P.
The energy index is dominated by fossil fuel companies, like Exxon Mobil, whose fortunes have risen along with oil and gas prices. When interest rates are high, financial companies can charge more for loans. Over the past week, big banks like Wells Fargo have reported good earnings. The share price growth of tech stocks was much higher than that of consumer companies, but they have been gaining ground in this new environment.
The stock market has lost some of it's enthusiasm for reasons other than monetary policy. As people venture out more, the stocks that flourished during the Pandemic Restrictions have begun to flag.
Some market analysts think there will be bigger problems. Jeremy Grantham, one of the founding members of the asset manager, predicts a catastrophic end to the bubble.
If they let a little air out of a potential bubble, the current losses could be beneficial. The S&P 500 rose nearly 27 percent last year, more than 16 percent in 2020 and nearly 29 percent in 2019.
The prospects for corporate earnings are good. The stock market party could continue at a slower pace once the Fed starts to act.
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