The U.S. equity markets have had a volatile start to 2022, with a backdrop of high inflation, an impending rise in interest rates, the latest variants of Covid-19 and supply chain issues across the world.
The S&P 500 started the year strong and hit an all time high before plummeting by 9.3% and then recovering slightly, leaving the market down 5.3% in February.
The VIX volatility index, sometimes known as the "fear index," spiked above 23, indicating market volatility is back. Tech stocks have been hit the hardest over the past year and this trend didn't change in 2022. The Nasdaq Index flirted with bear market territory and was down 17% from its November high.
This was driven by high inflation numbers (over 7% on the consumer price index (CPI)), which has turned out not to be as "transitory" as the Federal Reserve desperately tried to claim back in early 2021. The Fed has outlined plans for a tighter monetary policy to curb inflation. The market now expects a hike in interest rates in March and possibly a few more throughout 2022. It seems this rise has already been priced into most tech stocks.
Despite these macroeconomic issues, not all companies are reporting bad results. Earnings season has been in full swing as many companies such as Meta (FB, Financial), Spotify (SPOT, Financial) and Alphabet (GOOG, Financial)(GOOGL, Financial) have reported earnings. Most companies have released modest or negative earnings and guidance with both Meta and Spotify stock getting slammed. However, Alphabet is an outlier with strong results beating analyst expectations on both the top and bottom line. Following this, two-thirds of the members of the S&P 500 still need to report results, so expect lots of volatility moving forward.
The good news is the economy seems to be rebounding strongly and U.S. GDP increased at an annual rate of 6.9% in the fourth quarter of 2021, nearly keeping up with inflation.
The key numbers to watch in 2022 will be inflation (via the CPI) and interest rates. These macroeconomic factors will impact many equity investments moving forward. Good Luck!
