A wave of panic-selling hit Wall Street on Monday, sending the market down as much as 4 percent before it bounced back and ended with a slight gain.
It was a roller coaster of a day, and it showed how worried investors are about the economy and corporate profits.
The S&P 500 ended with a 0.3 percent gain, but not before plunging to a point where it was more than 10 percent below its Jan. 3 record. That kind of drop, called a correction, doesn’t happen often, and is a marker of investors’ souring attitudes toward stocks. The last time the S&P 500 was in a correction was March 2020, when fear over the emerging coronavirus pandemic gripped global markets.
It’s no coincidence that the wild day came just before the Federal Reserve begins its first policy meeting of the year on Tuesday, a two-day event that ends with a statement and news conference on Wednesday.
Markets across Asia were also lower on Tuesday, gripped by investor concerns over the Fed’s meeting and possible central bank tightening. Heightened tensions over Russia and Ukraine and the prospect of an invasion also worried investors, who sent every major stock market in the region down by more than 1 percent.
Tokyo’s benchmark index entered correction territory, finishing the trading day down 10 percent lower than a September high. China’s stock market was among the worst performing. In Shanghai, stocks fell 2.6 percent and in Shenzhen, technology stocks pulled the index down more than 3 percent. In Hong Kong, the Hang Seng index closed down 1.7 percent, while in Seoul, the Kospi dropped 2.8 percent.
European markets appeared to recover in early-morning trading on Tuesday, but futures contracts that track stocks in the United States were lower, pointing to possible declines when U.S. markets open on Tuesday morning.
The central bank is widely expected to begin raising interest rates in March, and to do so again several times this year, as it looks to combat fast-rising consumer prices. Investors are on edge, afraid interest rates could climb too quickly, hurting corporate profits, dampening consumer demand, and — in a worst-case scenario — tipping the economy into a recession. Some of the selling on Monday was set off by fear that the Fed might surprise markets on Wednesday.
“The sell-off was overdone and it had to do more with a panicky decline than it had to do with any rational adjustment to economic or Fed expectations,” said John Canavan, an analyst at Oxford Economics. While there probably won’t be any significant changes in the central bank’s policy this week, the attention on the meeting “focuses markets on the broader fact that the Fed is prepared to aggressively remove accommodation they hadn’t expected just a few months ago,” Mr. Canavan said.
The Fed slashed its main policy interest rate, the federal funds rate, to near-zero in 2020 as the central bank took extraordinary measures to shore up the economy after coronavirus lockdowns were put in place. Those low rates also helped fuel a huge rally in stock prices.
Now that the central bank is likely to unwind those measures, investors are rethinking their expectations for corporate profits, which might be crimped as heavily indebted companies pay more to borrow. They’re also reconsidering what they’re willing to pay for stocks. When interest rates rise, higher borrowing costs for houses and cars could also slow consumer spending, a pillar of the American economy.
The Fed could raise its benchmark rate — most likely by a quarter of a percentage point — as soon as March, economists expect, with some investors predicting three more increases this year. That would put the benchmark rate at 1 percent by the end of 2022.
But investors who are worried the Fed will be more aggressive also may have gotten carried away on Monday, said Gennadiy Goldberg, a senior U.S. rates strategist at T.D. Securities, who noted that some were discussing outcomes that the Fed hadn’t suggested, like a large rate increase in March or the possibility that it will raise interest rates each time it meets after this week, until inflation is under control.
Spilling over into financial markets are concerns about tension between Russia and Ukraine, with European stock benchmarks falling sharply on Monday.
The White House is considering deploying thousands of U.S. troops, as well as warships and aircraft, to NATO allies in the Baltics and Eastern Europe, in what would be a major shift from its restrained stance on Ukraine. On Sunday, the State Department ordered all family members of U.S. embassy personnel in Kyiv to leave Ukraine, citing the threat of Russian military action.
Heightened tension in the region threatens Europe’s energy supply, because Russia provides the continent with more than 40 percent of its natural gas and 25 percent of its oil. Europe is already coping with soaring natural gas prices caused by short supplies.
With Europe also struggling to contain inflation, which is already being driven higher by energy prices, “this could be a serious problem for the eurozone economy,” said Fiona Cincotta, an analyst at City Index in London.
The Stoxx Europe 600 and the DAX index in Germany both slid 3.8 percent on Monday.
As sudden as this month’s drop in stock prices has been, it follows an unceasing run-up that had started to unnerve some investors. The S&P 500 climbed 27 percent in 2021 — its third consecutive year of gains — and even after its drop so far in January the stock index is still about twice where it stood at its lowest point in March 2020, before the Fed first stepped in to bolster the economy.
Those gains continued late last year even as prices for food and gas climbed at a pace not seen in years, along with wages, and despite the overhang of the coronavirus pandemic. Speculators had also turned to investments as varied as cryptocurrencies, real estate and even trading cards and other collectibles, something that had alarmed many who saw signs that investors were getting carried away.
So a slide in prices that removes some of that excess was long overdue, many market watchers said.
“We haven’t had a correction in a long time,” said Lindsey Bell, the chief money and markets strategist at Ally Invest. “While this sell-off in the past couple of weeks feels uncomfortable, the good news is that, the sooner you have a sell-off or correction like we’re seeing today, the earlier and the more likely you are to make up that lost ground before year-end.”
That doesn’t mean it won’t be a bumpy year for stock investors. Growth in corporate profits is likely to slow, in particular among large technology stocks, and many companies championed by investors during the pandemic, like Peloton and Netflix, have tumbled as a return to normal means they lose momentum with new customers.
But some investors are concerned that even the largest tech companies may be faltering, something that will be exacerbated if interest rates climb — forcing them to dedicate more of their profits to debt payments, and also making it harder to achieve investors’ high expectations for growth.
Technology stocks, which have been on the leading edge of the market decline this year, were also walloped on Monday: The tech-heavy Nasdaq composite slid about 5 percent, before it rallied back to end the day with a gain of about 0.6 percent. The Nasdaq had already crossed the correction threshold last week and is now down 13.7 percent from its high.
Microsoft, the next of the big tech companies to report its profits, is expected to say on Tuesday that its bottom line rose 12 percent in the final three months of last year compared with a year ago, a substantial slowdown from its previous quarter, which was its most profitable ever.
More broadly, earnings from tech companies are expected to have risen nearly 15 percent in the fourth quarter. That’s down from full-year growth of nearly 28 percent, according to the market research firm FactSet.
“The return to normalization that we will see this year will include more moderate growth and higher interest rates,” said Ryan Jacob, the portfolio manager of the Jacob Internet Fund. “That’s a difficult environment for large-cap tech.”
Reporting was contributed by Jeanna Smialek, Jeff Sommer, Stephen Gandel and Alexandra Stevenson.