REUTERS Brendan McDermid
The S&P 500 slumped as much as 4%, slammed by worries about rising interest rates and geopolitical fears related to Ukraine. The index was more than 10% less than its Jan. 3 record high before it bounced back to end the session with a daily gain of 0.3%. It is now down 8.1% from its previous record. According to a widely used definition, a correction would be confirmed if the index closes 10% or more below its record closing level.
Wall Street has been reeling from the spiking inflation in recent months and growing expectations that the U.S. Federal Reserve will tighten monetary policy sooner than expected. Monday's early rout stemmed from concerns, as well as an announcement by NATO that it was putting forces on standby to prepare for a potential Russian incursion into Ukraine.
Because nobody knows what Fed Chairman Jay Powell will do, investors have gotten spooked. How can I hike three times, four times, five times? Gary Bradshaw, Portfolio Manager at Hodges Capital Management in Dallas, Texas, said.
The Russell 2000 index of small cap stocks RUT was down more than 20% less than its November record closing high of November.
The Russell index ended up 2.3% on the day, but is down 17% from its November record high after several weeks of steady declines. A close of 20% or more below its record closing high would confirm that the index is in a bear market.
Jake Dollarhide, head of Longbow Asset Management in Tulsa, Oklahoma, said that the session's low levels may have triggered buy signals.
He said that Russell 2000 hitting 20% down from its record might have been a bigger indicator than anything.
The fourth correction since the beginning of the epidemic was confirmed last week by the Nasdaq IXIC, which is now down 14% since its November record closing high.
The rising interest rates hurt shares of high-growth companies because investors value them based on earnings expected years, and high interest rates erode the value of future earnings more than the value of earnings made in the short term.
Michael James, managing director of equity trading at Wedbush Securities in Los Angeles, said that the Nasdaq and Russell 2000 have trailed the rest of the market because they have more stocks with higher multiples.
Steven DeSanctis, equity strategist at Jefferies, wrote in a recent note that small caps are pricing in a chance of a recession. He noted that high-yield spreads have not budged, nor have '22 earnings estimates, yet relative valuations are as cheap as they were in '20.
The index was trading at 21 times expected earnings after a month of decline in the S&P 500, but is still well above its 10 year average of about 17 according to Refinitiv data.
Energy SPNY is the only of 11 S&P 500 sector indexes with a gain year to date, up about 13%. Consumer discretionary SPLRCD and technology SPLRCT have been the worst performers in 2022, both down about 11%.