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S&P500 takes historic drop in 2022

The S&P 500 lost more than 20 percent of its value in the first half of 2022. This corresponds to its strongest decline since the 1970s.

The S&P500 index reflects "Corporate America" with its broad representation of the most important industry sectors in the country. In other words, the S&P 500 is an excellent way to understand how US companies and the US economy are doing.

Aggressive interest rate strategy

The current downward trend in the equity market started in January 2022. It is a historic downturn and makes investors, asset managers and the US Federal Reserve (Fed) extremely nervous.

The Fed is pursuing an aggressive strategy of raising interest rates to slow down soaring inflation rates. What started as a convincing strategy looks increasingly like a central bank in panic mode that cannot reign in the upward pressure on prices. As CNBC has reported, inflation in June 2022 jumped to 9.1 percent, a four-decade high, exceeding the Dow Jones estimate of 8.8 percent.

The continued interest rate hikes have been unleashed at breakneck speed and have stalled the equity market. In just a few months the Fed has increased the target interest rate from 0.00 to 1.5–1.75 percent. A Reuters poll for June forecasts the target interest rate to rise to 2.25–2.50 percent in July 2022, with a seventy-five basis points increase.

The Bank of Canada follows a similar path and has just raised the key interest rate by one hundred basis points. That is more than the expected seventy-five basis points and what analysts call a” big figure".

What will it take for markets to turn bullish again?

If the Fed exceeds the market expectations as well and increases the interest rate by one hundred basis points, the target rate will have increased more than ten times in just a few months. It will take time for the equity markets to adjust and get back on a growth trajectory.

All these aggressive interest rate hikes have one target only: to reduce inflation. If that does not happen the Fed runs out of options. However, if it works, the Fed could already consider reducing interest rates again in 2023, giving the equity markets a desperately needed boost.

Traders are now watching inflation data very closely to anticipate interest rate developments. They are also keeping an eye on the next wave of US companies reporting  their results, starting with the major US banks and hundreds of quarterly reports in the coming weeks.  This also adds to the volatility in the market.

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