January 10, 2022

Stock indices' worst start to a calendar year in 5 years

 The key US stock indices started the year 2022 with growth. It seemed for a moment that investors were ignoring all the fundamentals that entered the market. Monetary policy tightening by the US Federal Reserve is seen as the main reason behind a bearish equity market. However, when bitcoin plunged as soon as the regulator announced QE taper, the S&P 500, NASDAQ, and Dow Jones retraced slightly and traded at their all-time highs at the start of the new year. Anyway, the US stock market is expected to fall in 2022, unlike the cryptocurrency market that is anticipated to rise. Indeed, QE taper and rate hikes are highly unlikely to contribute to further growth in stock indices. It seems that investors have finally realized that.

At the same time, it is important to understand whether the US stock indices will only be falling if the Federal Reserve abandons the QE program in March and starts raising rates. Indeed, when the regulator tightened monetary policy earlier, the key US indices also showed growth. They increased at a slower pace than at the time of monetary stimulus, but still. In other words, it could be said that the US stock indices are rising no matter what. Nevertheless, when the Federal Reserve abandons stimulus, growth is weaker and corrections are stronger. It can be clearly seen on higher time frames. So, a deeper correction is likely to occur in 2022.

Of course, a lot will depend on the Federal Reserve's two-day meeting scheduled for January 25-26. Although QE tapering has not ended yet, the regulator may go for the first rate hike, experts say. The minutes of the December meeting reflect the stance of FOMC members who are in favor of an earlier-than-planned rate hike. In addition, the US inflation report this week will be of crucial importance. Indeed, the more inflation accelerates, the higher is the likelihood of a rate hike and monetary policy tightening. After all, the Federal Reserve no longer expects inflation to slow down on its own.