The S&P 500 rose Monday but closed out its worst month since March 2020 as expectations for higher interest rates erode enthusiasm for stocks.
The broad U.S. stock index retreated 5.3% in volatile trading in January as investors wrestle with the question of how tighter monetary policy will influence equity valuations. High inflation and a strong labor market have led Federal Reserve officials to accelerate their plans for unwinding support for the economy.
The central bank last week signaled that it would begin steadily raising rates in mid-March. Adding to investors’ anxieties in recent weeks: the possibility of a Russian invasion of Ukraine and the surge of the Omicron variant of Covid-19.
The suite of concerns has led to declines across the stock market, with 10 of the S&P 500’s 11 sectors retreating in the new year. Only energy stocks have bucked the downward trend.
“January really snuck up on a lot of people,” said Wayne Wicker, chief investment officer at MissionSquare Retirement. “Everybody was predicting volatility, but I think the declines in January probably exceeded expectations.”
The shift by the Federal Reserve unsettles a key support for stocks. Investors credit the central bank’s near-zero short-term interest rates and program of bond-buying with helping fuel the stock market’s run from its lows of March 2020. Even after pulling back in recent weeks, the S&P 500 is trading at about double that month’s closing low.
On the final trading day of January, the S&P 500 advanced 83.70 points, or 1.9% to 4515.55. The Dow Jones Industrial Average gained 406.39 points, or 1.2%, to 35131.86. The tech-heavy Nasdaq Composite advanced 469.31 points, or 3.4%, to 14239.88, chipping away at its monthly losses. The day’s gains built on a rally Friday for all three indexes.
Technology stocks have slumped this month as investors consider how rising interest rates could weigh on the group’s pricey valuations, which are based in part on expectations for growth far into the future. Microsoft shares dropped 7.5% in January, while Nvidia’s slumped 17%.
The Nasdaq Composite fell 9% in January, its largest one-month decline 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. “It was certainly due for a pullback.”
Trading in January has featured big days both up and down, as well as sharp intraday reversals.
“There has been extreme volatility so far this year,” said Louise Dudley, an equities portfolio manager at Federated Hermes. “People are particularly worried with the interest-rate expectations continuing to get higher. We’re definitely seeing from the U.S. that they’re very on top of the inflation numbers—they’re going to do everything they can.”
Ms. Dudley said she expects that volatility will lessen as investors get more clarity over whether inflation has peaked and how companies expect to be impacted by higher prices for energy, labor and materials.
Traders who look to January as an indicator of stock performance later in the year may have been dismayed. When the S&P 500 has fallen 5% or more in January, it has gone on to gain just 2.7% on average in the rest of the year, according to a Dow Jones Market Data analysis of performance since the index’s 1957 launch.
Investors are listening for clues about companies’ expectations as corporate earnings season continues. Analysts expect that profits from companies in the S&P 500 rose 24% in the fourth quarter from a year earlier, according to FactSet. About one-third of companies in the index have reported.
Strong earnings reports, coupled with the depth of the stock-price declines in January, make some investors think the market may rise from here.
“I think there’s a good chance that last week marked a short-term bottom,” said Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management. “The fundamentals have not validated the weakness”
Among individual stocks, shares of Netflix jumped $42.78, or 11%, to $427.14 on Monday after a ratings upgrade from Citigroup and share purchases by Co-Chief Executive Reed Hastings. Still, the stock ended January down 29%, its worst month since April 2012.
U.S.-listed shares of Sony rose $4.82, or 4.5%, to $111.66 after Sony Interactive Entertainment LLC said it is buying videogame developer Bungie. Earlier in January Microsoft said it would buy videogame giant Activision Blizzard.
Citrix Systems shares fell $3.61, or 3.4%, to $101.94 as the cloud-computing company said it would be taken private in an all-cash acquisition valued at $16.5 billion.
Shares of L3Harris Technologies dropped $9.38, or 4.3%, to $209.29 after the aerospace and defense company gave a downbeat revenue outlook.
Some investors are worried that the reversal of easy-money policies will weigh on tech stocks.
Photo: Allie Joseph/Associated Press
In bond markets, the yield on the benchmark 10-year U.S. Treasury note was little changed, edging up to 1.780% Monday from 1.779% Friday. The monthly yield gain was the largest since March 2021. Yields rise as bond prices fall.
Global oil benchmark Brent crude gained 17% for the month to $91.21 per barrel, its highest settle value since October 2014. Some analysts predict the price of oil will head even higher.
The price of gold slipped in January, losing 1.8% to $1795.00 per troy ounce. Bitcoin fell 17% in January to $38,443.54 at 5 p.m. ET Monday.
Overseas, the pan-continental Stoxx Europe 600 gained 0.7% for the day. In Asia, markets were closed in China and South Korea for a holiday. Hong Kong’s Hang Seng and Japan’s Nikkei 225 each added more than 1%.
Macau Legend Development 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.
Write to Karen Langley at [email protected] and Caitlin Ostroff at [email protected]
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