Since Tuesday, February 21, 2023, capital markets took a toll. On Tuesday, the stock market dramatically plummeted. This substantial decline is continuing throughout the week. The week ends with the stock market in red territories, and this leads us to wonder if equity markets won’t get into bear territory again. This question is valid and worth being asked. The Dow Jones is down 1.13%, the S&P 500 is down 1.28% and the NASDAQ Composite is down 1.98%. Why is the market has been performing so poorly this week?
The immediate answer is that investors are becoming nervous as the Federal Reserve is about to raise interest rates in March. This indicates a sort of “mini” panic in the stock market as investors are selling their shares in volumes, which is dropping the price of the stock of many companies. Among the major stock market indexes, the NASDAQ composite is the most affected. The NASDAQ Composite is the index that tracks the most valuable tech companies of the Fortune 500 companies such as Amazon, Tesla, Facebook, Microsoft, Apple…etc. Prior to President’s Day, the NASDAQ Composite closed at 11,787 points after opening at 11,777 points. This was a major boost for the tech industry. Since President’s Day, the NASDAQ Composite has been consistently declining from 11,787 to 11,364 points. The tech sector also engaged in major layoffs since last year.
Source: Yahoo Finance
What can we expect over the next coming weeks? The market will likely continue to decline until the Federal Reserve increases interest rates. This toll that the stock market has been taking is affecting the portfolio of retail investors. For those who practice value investing such as billionaire investors Warren Buffett and Charlie Munger, this decline of the stock market is the perfect opportunity to purchase more shares of the stocks already owned or to simply buy new stocks from companies that usually have a high stock price.
U.S. Treasury yields scrambled higher as well. The 2-year note surged 12 basis points to 4.81% while the 10-year note gained 7 basis points to top 3.95%. Moreover, the Personal Consumption Expenditures (PCE) price index—the Fed’s preferred assessment of how quickly prices are rising across the economy—rose 0.6% in January and 5.4 last year. The report from the Commerce Department also showed that consumer spending rose 1.8% last month from December after falling the previous month. If the market continues to sink, this may reduce investors' incentives to purchase assets, and more importantly, it may reduce consumer spending.