U.S. stocks fell Monday morning, extending a rocky start to 2022 for equity markets as interest rates rise.
The Dow Jones Industrial Average dropped 435 points, or 1.2%. The S&P 500 shed 1.4% and the Nasdaq Composite slid 1.8%. The S&P 500 and Nasdaq Composite are coming off four straight days of losses, while the Dow has retreated in three consecutive sessions.
The rough start to the year for stocks has come as interest rates have spiked. The benchmark 10-year Treasury yield was above 1.8% on Monday morning after ending the year near 1.51%. On Sunday, Goldman Sachs projected the Federal Reserve to hike rates four times in 2022, signaling that Wall Street increasingly expects the central bank to get aggressive in an attempt to curb inflation.
Large tech stocks were under pressure in early trading, with shares of Facebook-parent Meta and chipmaker Nvidia falling more than 4% and Amazon dropping 3%. Shares of video game publisher Take-Two fell more than 13% after the company announced a deal to purchase Zynga.
Canaccord Genuity strategist Tony Dwyer said investors should be prepared for volatility in the opening months of the year but a strong earnings season could support the market.
“Inflation is higher than expected, the Fed has signaled three rate hikes this year (the market has started to price in the possibility of four), the Omicron variant is again throwing global growth into question, and the supply-chain constraints remain an important issue,” Dwyer said in a note to clients. “Although the uncertainty surrounding these formidable challenges has created volatility, ultimately the market moves with the direction of [earnings per share], which should remain positive until money availability shuts down by the Fed becoming too tight.”
The Nasdaq is now down more than 6% for the year and is roughly 10% below its intraday record high from November. High-growth stocks in particular have struggled as interest rates jumped, especially after the Fed minutes released Wednesday showed central bankers discussing balance sheet reduction.
“That hawkish surprise hit the broad markets on Wednesday but especially high-growth and high-[price-to-earnings] tech stocks, as the prospects of the Fed aggressively tightening are most negative for high-growth/high-PE names,” Tom Essaye of the Sevens Report said in a note to clients Monday.
Investors readied for a big week that will include key inflation data as well as a confirmation hearing for Federal Reserve Chairman Jerome Powell. Earnings season also kicks off this week. The S&P 500 is expected to show a growth rate of 21.7%, which would be the fourth straight quarter above 20%, according to FactSet.
The consumer price index is set for release Wednesday and is expected to show a year-over-year increase of 7.1%, according to Dow Jones estimates. The producer price index, which measures wholesale prices, is slated for Thursday.
Powell is scheduled to testify Tuesday at his nomination hearing before a Senate panel, while the hearing on Fed Governor Lael Brainard’s nomination to the post of vice chair is set for Thursday. While both are expected to be confirmed, the hearings could provide key information about the future of monetary policy.
Financial heavyweights JPMorgan Chase, Citigroup and Wells Fargo release quarterly results Friday.
The three major stock averages all fell in the first week of the year. The S&P 500 slid 1.9% last week and the Nasdaq Composite dropped 4.5%. The Dow outperformed, fading just 0.3%.
