Stocks plunged Monday as pandemic-driven economic concerns, the prospect of higher interest rates and rising geopolitical tensions accelerated a bruising stretch for Wall Street.
The S&P 500 index fell into a correction, falling more than 10 percent from an all-time high after declining 3.8 percent on the day. The Dow Jones Industrial Average was down roughly 2.8 percent shortly before 1 p.m., a loss of more than 950 points, and the Nasdaq composite was down 3.6 percent.
Stocks have fallen off sharply through most of the year after a record-shattering 2021 as investors process a wide range of potential threats to corporate profits.
“The largest driver of this move has been the intensified level of uncertainty. The usual suspects for this uncertainty have been the Fed and their rate hike plans, hot inflation, and slowing growth,” wrote Lindsey Bell, chief money and markets strategist for Ally.
“Now we have the added uncertainty of geopolitics. The hardest part of times like this is the waiting for clarity,” Bell added.
The unprecedented spike in coronavirus cases driven by the omicron variant has throttled the recovery from the coronavirus recession. More than 12 million Americans have missed work because they or a dependent contracted COVID-19 earlier this month, and rising health concerns have pushed Americans away from activities with face-to face interaction.
Investors are also preparing for the Federal Reserve to begin raising interest rates from a near-zero baseline as soon as March after inflation hit the highest annual rate in nearly 40 years last month. Higher borrowing costs can squeeze business profit margins and discourage investment activity, which often depresses stocks.
Rising tensions among Russia, the U.S. and Europe over the former’s potential invasion of Ukraine are another factor shaking confidence in the market. Bond yields and gold prices have also begun to rise, a sign of investor concerns about higher borrowing costs and short-term stock volatility.
Investment experts had been bracing for a sell-off after a remarkably strong year for stocks. By Jan. 7, the Dow Jones Industrial Average was up almost 18 percent year over year, the Nasdaq was up 15 percent and the S&P was up a staggering 23 percent.
The momentum began to slip, however, as Wall Street began to grapple with the economic impact of omicron and a sharp pivot toward inflation-busting from the Fed.
The Fed’s monthly two-day monetary policy meeting, set to begin Tuesday, could play a pivotal role in the ongoing sell-off. The Federal Open Market Committee, which sets Fed monetary policy, is not expected to raise rates on Wednesday, but its analysis of the economy and a press conference from Fed Chair Jerome Powell could shed more light on the central bank’s plans.
“The policy objective at Wednesday’s meeting of the Federal Open Market Committee will be to prepare market participants for the major shift in policy that lies ahead: a rate hike in March, another in June, and a balance sheet runoff likely to start in June or July,” wrote Joe Brusuelas, chief economist at audit and tax firm RSM, in a Monday analysis.
“The key objective is for the Federal Reserve to lock in expectations for the next six months and to lay out what will most likely happen over the remainder of the year. This would imply that the news conference will be just as or more important than the policy statement,” Brusuelas added.