January was worst month for U.S. stocks since pandemic began

Stocks rose Monday, trimming some of their worst monthly loss since the early days of the pandemic, as Wall Street closed a tumultuous January wracked by worries that imminent interest-rate hikes will make everything in markets more challenging.

The S&P 500 was about 1.9% higher for the day. It's nevertheless still down 6.5% since setting a record exactly four weeks ago and is on track for a loss of 5.9% this month. That would be its worst since falling 12.5% in March 2020, when the U.S. benchmark index hit bottom after the pandemic suddenly shut down the global economy.

The Dow Jones Industrial Average was up about 405 points, or almost 1.2%, at 35,131, after erasing an earlier loss of 229 points, and the tech-heavy Nasdaq composite was 3.4% higher.

About three-fourths of the companies in the S&P 500 were up Monday, with technology stocks and a mix of companies that rely on direct consumer spending driving much of the rally.

Wall Street has shook this month as investors try to get ahead of a massive shift in markets, where the Federal Reserve is about to start withdrawing the tremendous stimulus it's pumped into the economy and markets. The wide expectation is for the Fed to begin raising interest rates in March, among other moves to make borrowing money less easy.

Sharp losses, sudden upturns

But uncertainty about how sharply and how quickly the Fed will move has helped cause severe swings on Wall Street, not just day-to-day but also hour-to-hour. Morning drops for stocks have quickly given way to sharp losses in the afternoon, and vice versa. On Friday, a sudden upturn in the last hour of trading managed to keep the S&P 500 from logging its fourth weekly loss in a row.

The month's heaviest losses have concentrated on parts of the stock market seen as the most expensive. Much of the focus has been on high-growth technology stocks, which were absolute stars of the pandemic amid expectations they can grow regardless of the economy. Tech stocks in the S&P 500 are down 7.9% this month, though they jumped 1.6% Monday.

Chipaker Nvidia rose 5.39% Monday, for example, though it remains down 18.3% for January.

Any time the Fed raises rates, the stock market has historically had at least some difficulty adjusting. When bonds pay more in interest, investors feel less need to reach for stocks and other riskier investments in search of returns. This time, the Fed is also turning off what's colloquially known as the "money printer" it's been using to buy bonds to keep longer-term rates low, and it will likely soon remove some of those extra dollars sloshing around the economy.

The market may have an even tougher time than usual with this rate-hike campaign, because the Fed is going to be moving when growth for the economy and corporate earnings may be set to slow, say strategists at Morgan Stanley.

Concerns over U.S. manufacturing

They pointed to what they see as worrying signs in data about U.S. manufacturing, among other factors.

"We remain sellers of rallies and of the view that S&P 500 fair value remains closer to 4,000 tactically," the strategists led by Michael Wilson wrote in a report. The S&P 500 closed Friday at almost 4,432 and Monday at about 4,515.

Others on Wall Street aren't as pessimistic, though. That's in large part due to broad expectations that corporate profits will continue to grow. For the full year of 2022, analysts are forecasting S&P 500 earnings will rise 9.5%, according to FactSet.

Stock prices have tended to track corporate profits over the long term. And if profits can continue to rise steadily, that could make up for one of the traditional effects of higher interest rates brought by the Fed: stock investors paying less for each $1 of corporate earnings.

"By now it should be clear that the strong pivot in monetary policy will make this year very different from last year," Solita Marcelli, UBS Global Wealth Management's chief investment officer for the Americas, wrote in a recent note. "Still, we think investors should not lose sight of the fact that the economy remains strong, which should limit downside from current levels."

Treasury yields climbed on Monday. The yield on the 10-year Treasury rose to 1.79% from 1.77% Friday. The two-year yield, which moves more on expectations about what the Fed will do with short-term rates, rose to 1.17% from 1.15%.

The Fed seems to have license to act more aggressively, with inflation at its highest level in nearly 40 years and the job market looking strong.

Investors are debating whether the Federal Reserve will raise short-term interest rates by only a quarter of a percentage point in March, the amount it usually does, or opts for a steeper half-point hike to jolt the market. They're also building up their expectations for how much the Fed will increase rates over the course of 2022.

Economists at BNP Paribas recently said the Fed may raise short-term rates by 1.5 percentage points this year from their record low of nearly zero, for example. That would translate to six increases of a quarter percentage point. Before that, it had been forecasting only four increases.

Across Wall Street, investors are even pricing in a 9% chance of seven hikes in 2022, according to CME Group. A month ago, they saw just a 0.3% probability of that.