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This 'investor triple-whammy' explains why stocks are down sharply and having a wild start to 2022

Jan 25, 2022, 23:08 IST
Business Insider
Traders have been rocked by volatility in 2022.Scott Heins/Getty Images
  • US and global stocks have slumped in 2022 as several pressures converge and drive up volatility.
  • Uncertainty about Fed policy, weak company earnings, and geopolitical tensions are key factors.
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It's been a wild start to the year in financial markets, with stocks and crypto tanking as a number of factors converge to shake investors' confidence.

After a crazy day on Monday, when the S&P 500 stock index plunged 4% before finishing in the green, equities resumed their dramatic fall Tuesday.

The tech-heavy Nasdaq 100 was 2.67% lower as of 11.10 a.m. ET, taking the index's losses for the year to more than 13%.

So, what on earth is going on?

The answer is that an "investor triple-whammy" has hit stocks, according to Ben Laidler, global markets strategist at trading platform eToro.

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Markets are worried about Federal Reserve policy, mixed fourth-quarter company earnings, and the prospect of war between Russia and Ukraine.

Here's what you need to know.

1. Uncertainty as the Fed prepares to hike rates

The Fed is going to raise interest rates in 2022 — but markets are increasingly uncertain about just how aggressively, and what the effects might be.

Traders by and large expect the Fed to hike four times this year, starting in March. Those expectations have driven up bond yields, and that has been disastrous for speculative technology stocks.

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When the so-called risk-free return on bonds are higher, companies whose full earnings potential lies far in the future look much less attractive. It's not exactly that investors are snapping up bonds. It's simply that a key piece of Wall Street math, which determines how stocks are valued, has changed dramatically.

In recent days, though, something else has also been going on. Many market players — JPMorgan boss Jamie Dimon among them — believe persistent inflation could force the Fed to hike harder and faster than previously thought.

That's led some investors to think that the central bank is going to choke off growth, and even put the economy in recession. Yields on longer-dated bonds — which reflect optimism about the economy — fell Monday, and are down again Tuesday.

2. Company earnings and outlooks are worrying investors

Fourth-quarter earnings reports have also knocked investors' confidence about how companies will fare over the next year. The Omicron variant, inflation and fading pandemic tailwinds are all causes for concern.

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Netflix is a prime example. Its stock crashed more than 20% on Friday after the streaming giant revealed it expects subscriber growth to slow sharply over the coming months. Competition from other services and a return to normal life is weighing on its financials.

Read more: Commodities are defying the crash in tech stocks and crypto as one of the 'best hedges on valuation pricing'. Wall Street pros lay out 7 reasons the outperformance is set to continue and 4 ways to play it.

Elsewhere in the market, shares in exercise-equipment company Peloton have dropped more than 18% in 2022 as demand for its products, which was red-hot during lockdown, fades.

And at the big banks, competition and inflation has pushed up pay packages sharply, driving up costs at the likes of Goldman Sachs and Morgan Stanley.

3. War could break out in Eastern Europe

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Adding to the cloud of uncertainty over markets is the incredibly tense situation in Eastern Europe, where Russia could be about to invade Ukraine.

The US on Monday put 8,500 troops on heightened alert over the situation. UK Prime Minister Boris Johnson warned of a possible "lightning" attack by Russia that could take out Kyiv, Ukraine's capital.

The geopolitical tensions have been particularly bad for stocks in Europe, where many countries rely on Russia for crucial energy supplies. But the drumbeat of war is adding to the gloomy mood in the US, too.

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