Stock Market Suffers Worst Week Since 2020. Here’s What Comes Next.

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The decline has been painful for investors who have been trained to buy on the dips.

Michael Nagle/Bloomberg

A bad start to 2022 just got a whole lot worse.

The

Dow Jones Industrial Average
declined 1646.44 points, or 4.6%, this past week. That looked stellar next to the

S&P 500,
which fell 5.7%, and the

Nasdaq Composite,
which dropped 7.6% and is now down 14% from its all-time high, hit back in November. All three suffered their worst weeks since 2020.

The drops make a strange kind of sense. Last year’s gains were fueled by a combination of easy monetary policy from the Federal Reserve, generous handouts from the federal government, and booming corporate earnings. Earnings should still be solid—corporate profits are on pace to grow by 24% during the fourth quarter, according to Refinitiv data—but the dollars have stopped flowing out of Washington and the Fed is preparing to raise interest rates. Against that backdrop, the market’s declines are logical. “It’s a rational response to the environment,” says Dave Donabedian, chief investment officer at CIBC Private Wealth US.

Rational it may be, but the decline has been painful for investors who have been trained to buy on the dips. The week featured two consecutive 1% rallies by the Nasdaq Composite that turned into losses by the end of the day. Thursday’s reversal was a particularly rare event. The

Nasdaq 100
was up 2% before giving back its gains and finishing down 1.3%, just the seventh time over the past 10 years it has seen a gain of 1.5% or more turn into a 1% loss.

The good news is that the index was higher one week later in five of six cases, notes Susquehanna Financial Group analyst Christopher Jacobson. “[For] those looking for signs of optimism…those past moves could offer some solace,” he writes. The…

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