The stock market in the United States fell on Monday after two Federal Reserve officials indicated that interest rates could rise above five percent, casting doubt on traders expecting lesser figures.
Data revealed that the S&P 500 closed Monday by failing to remain at the key 3,900 level, wiping out a 1.5 percent gain.
The Dow Jones Industrial Average performed poorly, while the Nasdaq 100 increased due to gains in big tech, including a six percent increase in Tesla Inc.
Arrowhead Pharmaceuticals was one of the Nasdaq Composite's top percentage losers shortly after the release of data from a mid-stage clinical trial of its liver disease drug. Merck and Johnson & Johnson stock drop also weighed on the blue-chip index.
Six of the 11 S&P sectors, led by Technology and Utilities, were trading in the green. Meanwhile, reports revealed that sectors such as Health Care and Consumer Staples had the poorest performance.
On the other hand, Alibaba soared among active stocks on Monday after Jack Ma relinquished control of Ant Group.
Rates may stay above five percent
As reported by Bloomberg, San Francisco Fed President Mary Daly said that the central bank would likely increase interest rates to above five percent.
Daly's statement was echoed by Atlanta Fed president Raphael Bostic, saying that lawmakers should charge above five percent by the start of the second quarter and then remain on hold for "a long time."
According to Chris Larkin at E*Trade from Morgan Stanley, aside from the probability of interest rates remaining high, "any bullishness triggered by slowing inflation may be offset by stocks still-high valuations and overly optimistic earnings expectations."
"It could be a recipe for choppy near-term and long-term trading," he said.
Even though investors are skeptical about economic growth forecasts, Morgan Stanley chief investment officer Michael Wilson asserted that corporate profit estimates are too high.
Wilson predicted the S&P 500 would slip much lower than the market's current estimate of 3,500 to 3,600 points in a mild recession.
Goldman Sachs Group Inc. analysts forecasted that profit margin pressures, shifts in U.S. corporate tax regulations and the possibility of an economic downturn would outweigh the beneficial effect of China's economic revival.
Regardless, Bloomberg reported that the growing threat of an economic downturn hadn't deterred corporate America from investing heavily in its own stock.
According to Birinyi Associates data, American companies revealed a record $1.26 trillion in buybacks in 2022, up three percent from the previous year.
Expectations for Thursday's CPI report
Investors are anticipating Thursday's U.S. CPI report, which will be released nearly a week after the latest employment data revealed that wage growth has slowed.
The figures will be one of the Fed's readings before their meeting on January 31 - February 1. Many investors also expect the report to show a slowdown in inflation and relieve the Fed's concerns about rising consumer prices.
"With all eyes on this week's CPI report, corporate earnings season, and next month's Fed meeting, we expect volatility to return," Mark Hackett, chief of investment research at Nationwide, said.
"Investors should avoid overreacting to large market moves as elevated volatility is our new normal."
The fourth-quarter earnings season will also begin later this week, with three of the country's largest banks scheduled to report their results.
In the bond market, interest rates were lower. The yield on the 10-year Treasury note fell four basis points to 3.53 percent. The two-year yield went from six basis points to 4.20 percent.
Regarding economic data, TD Ameritrade's investor movement index for December was 4.17 — the same as it was from November's reading.
In other news, developing-country equities have reached a bull market, bolstered by optimism about China's reopening and a shrinking dollar.
The MSCI Emerging Markets Index rose 2.5 percent on Monday, bringing its gains from an October 24 low to more than 20 percent.
"Wage gains have started to soften and that has given traders some hope that the Fed can relax its aggressive stance on inflation fighting in the months ahead."
Dan Wantrobski, technical strategist and associate director of research at Janney Montgomery Scott.