U.S. Stocks Fall as Investors Anticipate Fed Meeting

U.S. stocks traded lower on Monday, as investors grew cautious ahead of a busy week of central-bank meetings and corporate earnings.

The stock market fell today, with the S&P 500 dropping 0.7% and the Dow Jones Industrial Average falling 80 points, or 0.2%. The Nasdaq Composite declined 1.3%.

Stock markets have been on a volatile path higher in recent weeks, driven by signs of softening inflation and hopes that the Federal Reserve will continue to moderate its interest-rate increases. U.S. indexes registered solid weekly gains last week, with the S&P 500 adding 2.5%, the Nasdaq Composite jumping 4.3% and the Dow industrials rising 1.8%.

Risk-on investments like loftily-trading stocks, cryptocurrencies, and special-purpose acquisition companies are leading the market gains, in complete reversal from last year when the Fed's aggressive interest-rate increases hammered such investments.

The 50 worst-performing stocks in the S&P 500 last year have seen an average increase of around 20% so far this year, according to Dow Jones Market Data. In contrast, the 50 best-performing stocks from last year have only seen an average increase of around 2%.

John Quealy, chief investment officer at Trillium Asset Management, said that he has seen a lot of tech stocks making a strong comeback in January. Quealy said that he has recently added to tech positions in some of his investment strategies.

This week is shaping up to be another big one for corporate earnings, with over 100 members of the S&P 500 index set to report. In the tech sector, Spotify and Snap will report on Tuesday, followed by Facebook parent Meta Platforms on Wednesday. Thursday will see earnings reports from the three tech giants Amazon, Google parent Alphabet, and Apple.

Fed officials are widely expected to raise interest rates by a quarter of a percentage point when their two-day meeting concludes Wednesday. This would be the second straight meeting in which the size of the rate increase has been lowered. Officials are also likely to debate how much further they need to go in taming inflation before pausing rate rises.

Despite the recent stock market rally, investors remain cautious about the economy. The Fed, under Chair Jerome Powell, is determined to tame inflation, and many believe the Fed is unlikely to quickly begin lowering interest rates as it has done in the past. Some investors worry that sustained high rates could drag the economy into recession.

"The market has had a strong couple of weeks, but as we get closer to the Fed meeting, we may see some caution creep in," said Seema Shah, chief global strategist at Principal Asset Management. "Powell is likely to re-emphasize that they are not at the end of the road yet."

On Monday, shares of several major automakers fell after Ford Motor announced it would cut prices and boost production of its Mustang electric crossover. Ford’s stock fell 1.5%.

Bond yields rose globally after a strong inflation reading from Spain complicated the outlook for interest rates in the eurozone.

The yield on the benchmark 10-year Treasury note rose to 3.551% from 3.517% on Friday. Bond yields and prices move inversely to one another.

Both the European Central Bank and the Bank of England are expected to raise interest rates this week, with policy decisions from both due on Thursday. Inflation in Europe has not yet shown the sustained decline that has been seen in the United States.

According to Charles Diebel, head of fixed income at Mediolanum International Funds, there is an emerging divergence between the Fed and the ECB. In the United States, forward-looking inflation data is moving southward, while in Europe it is clear that the data has not yet begun to do the same.

Oil prices fell in commodity markets, with Brent crude dropping 1.2% to $85.39 a barrel.

European stock indexes were mixed on Wednesday, with the Stoxx Europe 600 falling 0.2% as technology stocks came under pressure.

Asian indexes were mixed on Tuesday, as markets in mainland China and Taiwan reopened following the Lunar New Year holiday. The Hang Seng Index in Hong Kong fell 2.7%, while the Taiex index in Taiwan rose 3.8%.