The S&P 500 rose on Monday but ended its worst month since March 2020 as expectations of higher interest rates undermine enthusiasm for equities.
The broad US stock index fell 5.3% in volatile trading in January as investors grapple with how tighter monetary policy will affect stock valuations. High inflation and a strong job market have prompted Federal Reserve officials to accelerate plans to withdraw support for the economy.
The central bank signaled last week that it will begin steadily raising interest rates in mid-March. Adding to investor fears over the past few weeks are the possibility of a Russian invasion of Ukraine and the rise of the Omicron variant of Covid-19.
The array of concerns has led to falls in stock markets, with 10 of the 11 sectors in the S&P 500 falling in the new year. Only energy stocks were able to escape the downward trend.
“January really crept up on a lot of people,” said Wayne Wicker, chief investment officer at MissionSquare Retirement. “Everyone was predicting volatility, but I think January’s declines probably exceeded expectations.”
The Federal Reserve’s postponement shakes a key support for equities. Investors credit the central bank’s near-zero short-term interest rates and bond-buying program with helping fuel the stock market’s run from its March 2020 lows. Even after falling for the past few weeks, the S&P 500 is trading about twice its monthly low.
On the last trading day in January, the S&P 500 rose 83.70 points, or 1.9%, to 4515.55. The Dow Jones Industrial Average rose 406.39 points, or 1.2%, to 35,131.86. The tech-heavy Nasdaq Composite rose 469.31 points, or 3.4%, to 14239.88, erasing monthly losses. Daily gains built on a Friday rally for all three indices.
Technology stocks have tumbled this month as investors ponder how rising interest rates could weigh on the group’s expensive valuations, which are based in part on growth expectations well into the future. Microsoft shares fell 7.5% in January, while Nvidia‘S
The Nasdaq Composite fell 9% in January, its biggest one-month drop since March 2020. The Dow Jones Industrial Average fared better, losing 3.3% for the month.
“Tech was just very highly valued, very overbought,” said Dustin Thackeray, chief investment officer at Crewe Advisors. “A pullback was certainly due.”
January trading was characterized by big days both up and down and sharp intraday reversals.
“There’s been extreme volatility so far this year,” said Louise Dudley, equities portfolio manager at Federated Hermes. “People are particularly worried about the continued rise in interest rate expectations. We’re definitely seeing in the US they have the inflation numbers up there – they’re going to do whatever they can.”
Ms Dudley said she expects volatility to ease as investors get more clarity on whether inflation has peaked and how companies expect to be affected by higher prices for energy, labor and materials.
Investors are awaiting clues on corporate expectations as corporate earnings season continues. According to FactSet, analysts expect earnings for companies in the S&P 500 to rise 24% year over year in the fourth quarter. About a third of the companies in the index have reported.
Strong earnings reports coupled with the depth of January’s share price declines have some investors believing the market could rise from here.
“I think there’s a good chance last week marked a near-term bottom,” said Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management. “Fundamentals have not confirmed the weakness”
Among individual stocks, shares of Netflix rose $42.78, or 11%, to $427.14 Monday after ratings were upgraded by Citigroup and shares were bought by co-chief executive Reed Hastings. Still, the stock ended January down 29%, its worst month since April 2012.
US-listed Sony shares rose $4.82, or 4.5%, to $111.66 after Sony Interactive Entertainment LLC announced it is buying video game developer Bungie. In early January, Microsoft announced it would buy video game giant Activision Blizzard.
Citrix Systems shares fell $3.61, or 3.4%, to $101.94 as the cloud computing company announced it would take it private in a $16.5 billion all-cash buyout.
Shares of L3Harris Technologies fell $9.38, or 4.3%, to $209.29 after the aerospace and defense company issued a bearish revenue outlook.
In bond markets, the benchmark 10-year Treasury yield was little changed, rising to 1.780% on Monday from 1.779% on Friday. The monthly gain in yields was the largest since March 2021. Yields rise when bond prices fall.
Global oil benchmark Brent crude is up 17% this month to $91.21 a barrel, the highest settlement since October 2014. Some analysts are predicting oil prices will head even higher.
Gold prices slipped in January, falling 1.8% to $1795.00 an ounce.
Overseas, the pan-continental Stoxx Europe 600 gained 0.7% on the day. In Asia, markets in China and South Korea were closed for a public holiday. Hong Kong’s Hang Seng and Japan’s Nikkei 225 each gained more than 1%.
Macau Legend Development’s shares fell 19% in Hong Kong after media reports of the arrest of its chief executive over the weekend on suspicion of money laundering and illegal gambling, including operating online casinos.
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