US stocks reverse heavy losses as buyers step in

Shares on Wall Street ended higher on Monday after investors took advantage of a sharp decline early in the session to snap up discounted stocks.

The S&P 500 index stock gained 0.3%, reversing a midday decline of up to 4%. At its lows, the blue-chip U.S. benchmark was more than 10% below an all-time high this month, known as the correction.

The changes throughout the trading day were intense, with volatility gauges reaching the highest levels since October 2020, ahead of the US election and the results of the effectiveness of vaccines developed by Pfizer and Moderna to prevent the spread of coronavirus.

Between its highs and lows, the S&P 500 rose 4.4 percentage points on the day. An intraday move of this magnitude has not been recorded since March 2020, when the coronavirus pandemic sent financial markets plummeting.

US stock markets have been rocked this month as the Federal Reserve is expected to quickly reverse the stimulus measures that have propelled stock markets for the past two years.

But as with previous selloffs, investors stepped in late Monday to buy the dip.

Nonetheless, 137 of the S&P 500 stocks are down more than 20% from recent highs, including top companies such as Moderna, Twitter, Netflix and Salesforce. The S&P 500 suffered its biggest loss since March 2020 last week.

“In this type of environment, you would expect the more speculative names to be the most affected, and that is what is happening,” said David Kelly, chief market strategist for JPMorgan Asset Management.

Kelly pointed to a hawkish pivot from the Fed, as well as concerns about the effect the Omicron variant of the coronavirus has had on economic activity and rising geopolitical tensions as Russia stations troops on the Ukrainian border.

“Everyone realized that this market had come a long way, given the continued uncertainty, and needed to undergo a correction,” he added.

Line chart of intraday price swing in the S&P 500 (%) showing US stocks swinging dramatically on Monday

Shares of major US technology groups have been among the hardest hit on Wall Street. The tech-heavy Nasdaq Composite index briefly fell 4.9% before rebounding to end the day in the green.

The trading brought the Nasdaq a hair’s breadth away from a so-called bear market – when all-time high losses topped 20%. Already, 69% of the more than 3,600 stocks in the index are down by that much or more.

Investors sought the relative safety of US government debt amid the selloff earlier in the day. An auction of two-year U.S. Treasuries drew its strongest demand since April 2020, with the yield rating dropping 0.05 percentage points to 0.95%.

Investors are “grimmed” by the Fed’s policy shift at its rate-setting meeting this week as the central bank seeks to rein in soaring inflation, said Gargi Chaudhuri, chief strategy officer. iShares Americas investment in BlackRock. They also focus on how quickly the Fed will start shrinking the size of its balance sheet by nearly $9 billion, which has already trickled down to financial markets.

“The idea that we are going to have policy normalization at the same time as we have balance sheet runoff will obviously be bad for financial conditions, and therefore bad for equity markets,” she said.

Goldman Sachs said over the weekend that it expected the Fed to signal that it would begin raising interest rates in March from historic lows near zero. The bank also warned customers of a “risk that the Federal Open Market Committee may want to take tightening action at every meeting until [the inflation] the image is changing” and that it could raise fares more than four times this year.

Futures markets have predicted that the world’s most influential central bank will raise its benchmark interest rate to more than 1% by December.

While higher interest rates increase borrowing costs for all businesses, they also make projected corporate earnings worth less in investor valuation models, with an amplified effect for tech companies. and other growth companies whose peak profits aren’t expected for years.

Tech shares had soared during the pandemic era due to a widely held view that social restrictions had accelerated the advancement of social trends such as online shopping, remote working and gaming. .

But speculative tech stocks had reached “valuations [that] don’t make sense in any investment environment,” Morgan Stanley strategist Michael Wilson said in a note to clients, and weren’t falling “just because the Fed is pivoting.”

In Europe, the Stoxx Europe 600 regional equity index fell 3.8% to its lowest level since October. Its tech sub-index fell 5.8%, its biggest daily decline since October 2020 and bringing its loss so far in January to more than 13%.

South Korea’s tech-heavy Kospi index fell 1.5% and Hong Kong’s Hang Seng Tech index fell 2.8%.

The Vix, Wall Street’s so-called fear gauge that measures expected volatility on the blue chip S&P 500 stock index, hit 38.94 points – its highest since October 2020.

Additional reporting by Jennifer Creery in Hong Kong and Leo Lewis in Tokyo

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