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Ahead of Fed meeting, volatility is the name of the game on Wall Street

Experts are not sure if it is jitters before the Federal Reserve announces it will raise rates, or if markets are in the midst of a correction, but one thing is for sure: the past week has not been a good time for the faint of heart.

MANHATTAN (CN) — Mr. Toad, eat your heart out.

For the past seven trading days, investors have seen a wild ride the likes of which it hasn’t experienced since the beginning of the Covid-19 pandemic, with Wall Street banking on the Federal Reserve to help stabilize markets Wednesday.

A day after the Dow Jones Industrial average fell more than 1,000 points only to recover and gain about 100 — with the S&P 500 and Nasdaq following the same pattern — all three indices again saw wild swings. In early-morning trading, the Dow again plunged more than 800 points, but by 10 a.m. it started a steady slog upward.

By the closing bell on Tuesday, the Dow fell just 67 points, or 0.2%, while the S&P 500 and Nasdaq had more significant losses, at 1.2% and 2.2%, respectively.

It is unclear whether the ups and downs will continue past Wednesday, when the Federal Open Markets Committee releases the minutes from its latest meeting and Fed Chair Jerome Powell will address reporters.

“The market is exhibiting withdrawal symptoms as it is dealing with the possibility of the removal of the Fed put,” said Anu Gaggar, global investment strategist for Commonwealth Financial Network. “It almost feels like the market is behaving a little incoherently, not knowing which way to go — go down because the Fed is tightening or go up before the Fed is finally acting to rein in inflation and is loading up on ammunition while economic growth remains strong.”

Most experts believe a rate hike by the Fed in March is inevitable, regardless of what economic data show about growth or inflation, though Powell’s comments on Wednesday will be heavily scrutinized. Analysts also will be keen to hear more about how the central bank plans to unload its $9 trillion balance sheet.

Experts also are unsure whether this is a true correction, which is defined as a decline of at least 10% from a market peak. As of Monday’s closing bell, the Nasdaq has fallen 1,789 points, or 11.4%, since the end of 2021. The drop in tech stocks is largely to blame for that index, and the Dow and S&P have fared much better; they have fallen only 5.4% and 7.4%, respectively, during that period.

“It was a nasty week, but we may be closer to the end of this correction than the beginning,” James Meyer of Tower Bridge Advisors wrote on Monday. “After the recent correction, it is hard to make a case that all stock are overvalued. Most were. Now only some are, but momentum can be powerful.”

One thing is for sure: the pendulum is swinging faster than it has in months. The VIX, which is considered Wall Street’s “fear index” and a measure of volatility surrounding equity trading, has been on an upward trajectory since mid-January, capping out around 30 points by the end of trading on Tuesday.

Gaggar notes that the recent swings might be a good thing, as “not having such sharp reversals every so often is out of the ordinary and a sign that excesses might be building up in some corners.” She noted that, “outside of a catastrophic event that changes the underlying fundamentals of the economy or of corporate America, such volatility should be welcomed as it takes some steam off an overheated market.”

With the unpredictability of coronavirus, as well as recent world tensions over Ukraine, such a catastrophe can’t be ruled out. The full impact of the omicron strain likely hasn’t been felt yet, either.

“The surge in omicron infections means more people were self-isolating in early January than at any time since the beginning of the pandemic, although the impact that will have on employment and output remains uncertain,” wrote Paul Ashworth, the chief North America economist at Capital Economics.

Ashworth noted that gross domestic product growth rebounded during the fourth quarter of 2021 to 4% annualized, though that is a far cry from the 6.5% Capital Economics had forecast earlier this year.

“The disruption caused by the rapid spread of the omicron variant is a downside risk to our forecast that GDP growth will be 1.5% annualized in the first quarter,” he noted. “But cases have already peaked nationwide and in the Northeast are falling more quickly than in previous waves, so the disruption should prove short-lived.”

Ashworth and his economics team predict global growth in 2022 will be slower than last year but that the Fed will “push ahead” and raise interest rates to at least 2% by the end of 2023.

The toll of omicron has continued to take its toll on the consumer confidence, as well. The Conference Board’s consumer confidence index dropped 2 points this month, though it is still about 50 points higher than it was a year ago.

Surprisingly, the survey suggests inflation is not as big a deal for consumers as it was two months ago. According to the Conference Board, inflation fell for the second straight month after hitting a 13-year high in November 2021.

“Expectations about short-term growth prospects weakened, pointing to a likely moderation in growth during the first quarter of 2022,” Lynn Franco, senior director of economic indicators for the group, said in a statement. “Looking ahead, both confidence and consumer spending may continue to be challenged by rising prices and the ongoing pandemic.”

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