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  • Ananya Agarwal

A Shaky Start to the Year for the S&P 500 Index

The stock market is acting much like Boston weather in the beginning of 2022: unstable. In short, The S&P 500 Index measures the market capitalization of 500 U.S. large cap companies. The S&P 500 Index performed less bullish than expected in the first two months of the year. Market cap for a company is calculated by multiplying the outstanding stocks (publicly traded stocks that are held by stakeholders) with the current price of its stock.

Each company is allotted a different weightage, calculated by dividing the market cap of the company to the S&P 500’s total market cap. The companies are selected by a committee that evaluates liquidity, size, and industry. There are multiple criteria that the companies must meet before they are even considered. For example, they must be based in the States and have an unadjusted cap of at least $13.1 billion dollars to qualify for the index.

Photo Courtesy: Getty Images

In January 2022, the S&P 500 index saw its worst month since the COVID-19 pandemic shut down the global economy in March 2020. It was also the worst January performance since 2009. The S&P 500 Index fell down to -5.3% despite seeing 1.9% growth on the last day (see graph below).

Photo Courtesy: CNBC

There are multiple reasons for the decline of the market. It is, mainly, an outcome of the general environment of the uncertainty caused by the new COVID-19 omicron and predictions around Federal economic policy. The Federal Reserve Board (the Fed) is expected to retract most of its policies that aimed to support the economy during the peak of the pandemic. These policies had stimulated the economy by reducing the interest rate to practically zero and spending trillions on bond-buying. This resulted in a record high inflation which seems to be more persistent than expected and could lead to recession. To stabilize the economy, the Fed is expected to increase interest rates and stop purchasing of bonds. As interest rates rise, buying bonds from the Fed ensures not only better returns but a less risky investment compared to stocks, leading to a shift in demand.

The S&P Index has also been negatively affected by international instability. The Russia-Ukraine crisis affected certain sectors, including oil, thus ultimately leading to stock market volatility. Increased sanctions since the full-scale invasion has caused further consequences with no resolution on the horizon. Moreover, the international impacts of the omicron variant hit hard the earnings of most firms due to lower productivity, restrictions, and declining foot activity which affected consumer confidence in investing in companies.

A bad start to the year historically has meant an overall bad year for the market, but Wall Street analysts predict differently for 2022. In the past, a negative January led to an average rise in stocks by only 2.7% over the final 11 months, but LPL financial chief market strategist, Ryan Detrick states that the past 9 out of 10 times that January saw a poor performance, the final 11 months saw huge gains.

Photo Courtesy: LPL Research

These past recoveries (see table above) serve as a symbol of hope in an otherwise unstable beginning to 2022. Also, the high-low spread - difference between the highest and lowest point of the day as measured by the market tracking S&P 500 Index - has been somewhat stable at 1.6 compared to the standard 1.4.

Experts like David Kostin, chief U.S. stock market strategist at Goldman Sachs, and Mark Haefele, UBS’s top stock strategist, predict an upward growth. They claim that the market can finish at a growth of 15%. This prediction of ultimate growth is supported by research published by Bank of America which suggests greater inclination of investors towards buying than pulling money out as Bank of America users have bought 2.3 billion dollars more in stocks than they sold.

The future of the stock market remains uncertain amidst a grim global economic forecast. Ultimately, its overall trajectory will depend on how the Fed rolls out its policies and how the market responds to it. Change in the S&P 500 Index in January 2022 did not change political decisions as the Fed sees them as temporal changes in the face of looming consequences of high inflation. There are multiple predictions about the future of the index. The Russian - Ukraine crisis will affect the oil supply drastically and impact nearly every element of global markets. On the other hand, it is expected that tech companies will continue to grow. Recent trends have suggested that a bad January doesn’t necessarily mean a bad year. The market can steadfastly recover from the blow and adjust to the new political changes. As the pandemic abates, the companies in the S & P500 Index are expected to grow too, leaving small glimmers of hope.

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