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3 factors affecting the US stock market today


Jhe selling in April continues for another day and investors are adjusting their positions. The S&P 500 has fallen for three straight weeks, and price action doesn’t look promising this week either. Several factors are making investors nervous, such as the Federal Reserve’s hawkish monetary policy. However, other important fundamentals are also driving the current sell-off in the markets.

Here are three important factors impacting the US stock market right now.

Stock market performance

Before we jump in, here’s how the stock market is doing today. The S&P 500 index is down 11% year-to-date (YTD) and the Dow Jones Industrial Average is down 7% year-to-date. The Nasdaq, the tech-heavy index, has fallen 19% since the start of the year.

Factors Affecting the Stock Market Today

1. The Fed’s monetary policy stance is one of the main reasons we are seeing a selloff in US equity markets. The Fed did not adopt a hawkish stance overnight; they’ve been communicating their message for a while. However, since last week, the selling intensified as traders began to digest the message from the Fed.

The current monetary policy stance is perhaps the most hawkish stance taken by the Fed in decades. The central bank is trying to bring down inflation from its highest level in almost 40 years.

Initially, Fed Chairman Jerome Powell began his monetary policy communication by priming markets for 25 basis points. However, more recently, he mentioned that the Fed may raise the interest rate at its next policy meeting, which will take place next week, by -50 basis points. On top of that, the Fed wants to shrink the size of its balance sheet, and it wants to do that aggressively. This made traders extremely nervous, as this type of monetary policy is very likely to deeply reduce US economic growth.

The fact that inflation has already hit a multi-decade high, economic data is flagging, and the Fed wants to aggressively raise interest rates and shrink the size of the balance sheet doesn’t paint a rosy picture. for riskier assets such as stocks.

2. Supply chain issues are still very entrenched and China is determined to maintain its zero-tolerance policy. Recently, China extended its covid test to 10 districts, and the fear is that this could lead to further closures if the numbers do not match satisfactory levels.

Basically, higher US inflation, hawkish Fed monetary policy and covid zero tolerance policy are negatively influencing US valuations. The current earnings season shows that companies that have released reports so far are exceeding expectations overall. However, a lot of hot air has started to come out, and this is influencing mega-cap stocks.

Last week’s heavy sell-off came on the back of disappointing results from streaming giant Netflix, which failed to impress subscriber numbers. There are several reasons why Netflix has seen a major drop in its numbers, but the factors mentioned above, such as higher inflation, certainly make the situation worse.

It’s important to point out that Netflix is ​​still a growth stock, in my view, and the current sell-off or sentiment around its stock price is overcooked. The company is reshaping its strategies and adapting to new realities. It will come as no surprise to see the stock skyrocket once again when it begins a new revenue line, namely ads.

Nevertheless, Netflix is ​​a heavyweight stock for the S&P 500, and its falling valuation has rattled sentiment, and small-cap companies aren’t strong enough to lift the index out of its misery.

3. Mega-cap companies may have the ability to digest some of the higher costs, and their profit margins won’t be influenced so much by the current situation. However, small cap or mid cap stocks are finding the current climate difficult for their profit margins as they do not have enough capacity to digest the current price shock. This means that the current support we are receiving from small-to-mid cap stocks may also start to fade.

Plus, mega-cap stocks are sitting on big piles of debt. Since the Fed is extremely hawkish with its monetary policy, we could see the long-term debt price curve rise, and if that happens, we could see more pressure on their profit margins. This is further hampering sentiment in the markets.

In conclusion, the market is expected to continue its downtrend until inflation peaks and aggregate supply and demand stabilizes. The Fed will attempt to reduce aggregate demand to bring prices down to reach target inflation levels. For now, the equity market could decline as investors fear inflation, slowing growth and rising interest rates.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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Eleon

"Writer. Coffee practitioner. Twitter specialist. Food trailblazer. Subtly charming analyst. Troublemaker. Unable to type with boxing gloves on."
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