The Dow Jones Industrial Average (DJIA), the S&P 500 (SPX), and the Nasdaq Composite (COMP) booked their first yearly drop since 2018, driven by aggressive interest rate hikes from the U.S. Federal Reserve.

For 2022, the Dow Jones declined -8.8%, the S&P 500 lost -19.4%, and the Nasdaq collapsed by -33.1%and it is essential to say that the annual percentage declines for all three indexes were the biggest since the 2008 financial crisis.

The U.S. Federal Reserve hiked the benchmark interest rate by 50 basis points in December 2022, and it is important to note that the federal funds rate is now in a range of 4.25% to 4.5%, which is the highest level since the 2007 year.

Despite this, inflation remains well above what the Fed thinks is consistent with stable prices, and the U.S. central bank has more work to do. Scott Wren, a senior global market strategist for Wells Fargo Investment, said:

The reality is, we believe that we are likely to experience some market turbulence in the nearer term before the skies begin to clear as we approach and work through the middle portion of 2023. That means we anticipate a continued defensive portfolio stance in the opening weeks and likely months of next year.

Investors continue to worry that an aggressive Federal Reserve will push the economy into a deep recession that could dent corporate earnings and stock markets.

The outlook for risk appetite in the near term is not looking good, and going forward, the U.S. stock market is going to be hypersensitive to any sort of FED comments.

S&P 500 down -19.4% in 2022

S&P 500 (SPX ) weakened by -19.4% in 2022 and closed the year at 3,839 points. On the chart below, we can also see that the price is still not able to stabilize above the 10-day moving average, which could be an indication that we could see a further decline in the weeks ahead.

Data source: tradingview.com

The current support stands at 3,600 points, and if the price falls below this level, it would be a “sell” signal, and we have the open way to 3,500 points.

The upside potential still remains limited, but if the price jumps above 3,900 points, the next target could be resistance that stands at 4,000 points.

DJIA down -8.8% in 2022

The Dow Jones Industrial Average (DJIA) weakened by -8.8% in 2022 and closed the year at 33,147 points.

Data source: tradingview.com

The current support level stands at 32,000 points, and if the price falls below this level, the next target could be 31,000 points. If the price jumps above 33,500 points, the next target could be resistance at 34,000 points.

Nasdaq Composite down -33.1% in 2022

Nasdaq Composite (COMP) has lost -33.1% in 2022 and closed the year at 10,466 points. The prospect of a more aggressive monetary policy keeps investors in a negative mood, and the upside potential for Nasdaq Composite remains limited.

Data source: tradingview.com

On the chart above, we can also see that the price has moved again below the 10-day moving average, which indicates that we can see a further decline in the days ahead.

The important support level for Nasdaq Composite stands at 10,000 points, and if the price falls below this level, the next target could be 9,500 points or even below.

Summary

The Dow Jones, the S&P 500, and the Nasdaq booked their first yearly drop since 2018, driven by aggressive interest rate hikes from the U.S. Federal Reserve. There is a big probability of another interest rate hike when Fed policymakers meet in February, and investors continue to worry that an aggressive Federal Reserve will push the economy into a deep recession.

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