Why Is the Stock Market Falling? Volatility Continues With Earnings, Fed Ahead

With the S&P 500 more than 10% below its January all-time high, it’s in correction territory again on Tuesday. It’s also still below its 200-day moving average, a sign that investors are still far from confident in the market. 

“The S&P 500 intra-day relief rally on 1/24 was a ‘head fake,’” wrote Stifel’s head of institutional equity strategy Barry Bannister, who is looking for more downside. 

On Monday, the S&P 500 and Nasdaq both spent some time down more than 3% for the day, before all three indexes staged a comeback to end in the green. From the S&P 500’s lowest point to the close of trading, the index gained 4.4%. 

That’s typical of market drawdowns and volatile periods, like those seen in the wake of the financial crisis and in late 2018. “Big intra-day rallies like yesterday have occurred either during the worst market declines or they ended up marking key lows right after them,” wrote Frank Cappelleri, chief market technician at Instinet. 

Sure enough, it isn’t as if key risks to the market are going away. 

All eyes are currently on the Fed, which is releasing its monetary policy decision Wednesday. Markets are anticipating several interest rate hikes this year, but will be hanging on the words of Fed Chair Jerome Powell to see just how many. If there is any indication that the Fed will be hiking many times over the coming years to stave off high inflation, markets will expect a slowdown of economic growth. 

If the Fed suggests it will reduce the size of its balance sheet sooner rather than later, long-dated Treasury bond yields could pop again. Less demand from the Fed would lower bond prices and lift their yields, which has already happened this year. Higher long-dated bond yields make future profits less valuable, causing stock valuations to decline. 

The Fed’s comments may not necessarily surprise markets at this point, but they will at least outline why stocks have had such a rough ride of late. “We expect the Fed to acknowledge the near-term risks to growth, but ultimately to maintain its newfound hawkish stance,” wrote Lauren Goodwin, economist and portfolio strategist at New York Life Investments. But “if the Fed is forced to hike rates quicker… the risk of a slowdown in the real economy increases.”

Hopefully, for investors, upcoming earnings reports can help bring stocks higher—or at least soften the blow.

More than 100 companies in the S&P 500 report results this week, with Big Tech player

Microsoft

(ticker: MSFT) likely the most important in the day ahead. Sharing the earnings spotlight with Microsoft are

Johnson & Johnson

(JNJ),

Verizon Communications

(VZ),

Texas Instruments

(TXN),

General Electric

(GE),

Moderna

(MRNA), and others.

But so far, better-than-expected earnings beats haven’t done the trick. While the majority of S&P 500 companies are beating earnings estimates, according to Wells Fargo, the average S&P 500 stock reaction in the day after an earnings beat was down 0.3%, as of Monday.

That often happens when companies are valued too richly; the expected profit stream is already reflected in the stock price.

Overseas the picture was mixed. London’s FTSE 100 rose 1% while in Tokyo the Nikkei 225 ended 1.7% lower.

Elsewhere, futures for West Texas Intermediate crude oil rose 2.2% to just over $85 a barrel.

Cryptocurrencies were trying to claw back losses from Monday but remain beaten down.

Bitcoin,
the leading digital asset, was up 8% to above $36,000, before dipping 0.9%. It had traded hands near $33,000 in the depths of Monday’s selling, but hovered near $42,000 as recently as the end of last week. Bitcoin remains well off its record high of $68,990 reached in early November.

“Bitcoin believers are trying to hold the line,” said Edward Moya, an analyst at broker Oanda. “This is a key moment for Bitcoin and if panic selling returns on Wall Street, the $30,000 level might not prove very supportive.”

Here are six stocks on the move Tuesday:

Logitech

(LOGI) shot up 2.7% after the personal computer and gaming peripherals company posted better-than-expected results in the last quarter and raised its fiscal 2022 guidance.

Ericsson

(ERIC) gained 6.3% after the telecommunications equipment company reported quarterly earnings well above expectations, driven by higher sales as countries roll out 5G.

Credit Suisse

(CS) was down 2.9% after the Swiss bank said it would take a litigation provision of CH500 million ($544 million) in the fourth quarter of 2021. The company also said its investment division will be loss-making in the quarter as a result of poor performance in its wealth management unit.

Unilever

(UL) slipped 1.5% after the consumer-goods giant confirmed that it would cut 1,500 jobs amid a new proposed organizational model.

General Electric

(GE) stock fell 6.7% after the company reported a profit of 92 cents a share, beating estimates of 84 cents a share, on sales of $20.3 billion, below expectations for $21.5 billion. 

3M

(MMM) stock fell 0.2% after reporting a profit of $2.31 a share, beating estimates of $2.01 a share, on sales of  $8.6 billion, in line with expectations.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com and Jack Denton at jack.denton@dowjones.com