A trader works inside a booth at the New York Stock Exchange. File photo: REUTERS/BRENDAN MCDERMIDThe S&P 500, which is widely considered to be the main benchmark for the performance of US equities, dropped 13.3% through April, the steepest four-month decline to start any year since 1939. The index continues to fall in May and was down 16% so far this year at Tuesday’s close, approaching the 20% threshold that some investors consider confirmation of a bear market.
The main factor cited by investors and analysts is the policy change at the Federal Reserve. As the pandemic took hold, the US central bank implemented emergency policies to stabilise the economy that investors say also emboldened buying of stocks and other riskier assets. But the Fed early signalled in 2022 that it was pivoting to tighter monetary policy to damp down surging inflation, a significant change to the investing environment.
At the same time, expectations of tighter Fed policy have pushed up previously dormant bond yields. The yield on the 10-year US Treasury note has already roughly doubled this year to 3%, its first time above that level since late 2018, when the Fed was reaching the end of its last tightening cycle. Higher bond yields especially dull the allure of technology and other high-growth sectors, which are valued for their potential cash flows and lose appeal when bond yields rise. Investors say that impact has been reflected in the outsize declines notched by some post-pandemic growth bets, with the Russell 1000 growth index down 24% this year.Beyond the Fed’s change, Russia’s war in Ukraine has fuelled further economic uncertainty.
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