The Wild West days of intense market volatility seem to be back on Wall Street. Stocks fell on Friday with Dow Jones Industrial Average posting its worst weekly loss since October. The blue-chip average fell more than 530 points, a drop of around 1.6%. Nasdaq and S&P 500 were among the biggest decliners.
This week, the 30-stock Dow lost 3.5%, its worst weekly pullback since late January, with Nasdaq and S&P down by 0.2% and 1.9%, respectively.
Why is Dow down?
The fall comes after St. Louis Federal Reserve President, James Bullard, said the central bank could hike interest rates in 2023. In fact, it may be even earlier than that as the Fed could start raising rates as soon as 2022 to combat higher-than-expected inflation. His comments have put pressure on stock prices and have seen investors fretting like never before.
Inflation and the hike in interest rates are not the only things investors are nervous about. Wall Street is also worried about the Fed’s idea of tapering and its decision to take away the stimulus it injected into the market during the height of the global health pandemic.
Are investors overreacting?
The broader stock market and the volatility index in 2021 have been unusually quiet and less alarming for investors. This is despite the big moves in Bitcoin & other cryptos and the craziness with meme stocks like Dogecoin (DOGE).
Investors may be overreacting to these changes. For one thing, Bullard–who doesn’t even have a vote until next year–is just one man and the remaining Fed members could vote against the rate hike.
It isn’t surprising that stocks are retreating. Since 2020, U.S. stocks have been outpacing the economic recovery and have hit several highs. The markets, according to Derek Halpenny of MUFG Bank, will be “more spooked by 2022 turning to a rate hike, because that will mean they have to taper as well.”
