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S&P 500 enters correction as global stocks tumble Tech groups are among hardest hit as investors

The declines in US indices mirrored drops across Europe and Asia © Ahn Young-joon/AP

Stocks across the globe slid on Monday as expectations built that the US Federal Reserve will need to rapidly unwind stimulus measures that propelled equities markets over the past two years.

The S&P 500 stock index fell 1.4 per cent by midday in New York as a sell-off extended into its fourth week. The blue-chip US benchmark is now more than 10 per cent below an all-time high hit this month, known as a correction.

Roughly 165 of the stocks in the index are now down more than 20 per cent from recent highs, including high-profile companies such as Moderna, Twitter, Netflix and Salesforce. The S&P 500 last week suffered its biggest loss since the pandemic rocked global financial markets in March 2020.

Air has been rushing out of previously high-flying parts of the market this month. The price of bitcoin briefly slid as much as 7 per cent before rebounding. Cathie Wood’s flagship Ark fund, which has large holdings in electric carmaker Tesla and the cryptocurrency exchange Coinbase, fell 2.4 per cent on Monday. The fund is down 56 per cent from its all-time high.

“In this kind of environment you’d expect the most speculative names to be hit the worst, and that is what is happening,” said David Kelly, the chief market strategist for JPMorgan Asset Management.

Kelly pointed to a hawkish pivot from the Fed, as well as concerns over the effect the Omicron coronavirus variant has had on economic activity and rising geopolitical tensions as Russia stations troops on the Ukrainian border.

“Everyone realised that this market has gone up a long way, given continued uncertainty, and it was due for a correction,” he added.

Shares in big US tech groups were among the hardest hit on Wall Street, pushing the technology-heavy Nasdaq Composite index 1.2 per cent lower.

The fall took the Nasdaq’s drop to 16 per cent from an all-time high struck in November, with the declines nearing a so-called bear market — when losses breach 20 per cent. Already, 71 per cent of the more than 3,600 stocks in the index are down that much or more.

Instead, investors sought out the relative safety of US government debt. An auction of two-year US Treasuries drew its strongest demand since April 2020, with the yield note falling 0.05 percentage points to 0.95 per cent.

Investors are “gripped” by the shift from the Fed to tighten policy at its rate-setting meeting this week as the central bank seeks to tame surging inflation, said Gargi Chaudhuri, the head of iShares investment strategy in the Americas at BlackRock. They are also focused on how quickly the Fed will begin to reduce the size of its nearly $9tn balance sheet, which has already reverberated across financial markets.

“The idea we are going to have policy normalisation at the same time we have the balance sheet runoff will obviously be bad for financial conditions, and therefore bad for equity markets,” she said.

Goldman Sachs said at the weekend it expected the Fed to signal that it would begin raising interest rates in March from historic lows of close to zero. The bank also warned clients of a “risk that the Federal Open Market Committee will want to take some tightening action at every meeting until [the inflation] picture changes” and that it could increase rates more than four times this year.

Futures markets have priced in the world’s most influential central bank raising its benchmark interest rate to more than 1 per cent by December.

While higher interest rates raise borrowing costs for all businesses, they also make companies’ projected profits worth less in investors’ valuation models, with the effect magnified for tech and other growth companies whose peak earnings are not expected for years to come. Tesla and chipmaker Nvidia each fell about 5 per cent on Monday.

Technology shares had soared during the pandemic era because of a widely held view that social restrictions had sped up the advancement of social trends such as online shopping, remote working and gaming.

But speculative tech stocks had achieved “valuations [that] don’t make sense in any investment environment”, Michael Wilson, Morgan Stanley strategist, said in note to clients, and were falling not “just because the Fed is pivoting”.

In the US, an index of unprofitable tech stocks collated by Goldman has lost 23 of its value this year. The Tokyo Stock Exchange’s Mothers market for high-growth start-ups has dropped about 18 per cent.

In Europe, the Stoxx Europe 600 regional share index fell 3.8 per cent to its lowest level since October. Its tech sub-index dropped 5.8 per cent, its steepest daily decline since October 2020 and taking its loss so far in January to more than 13 per cent.

South Korea’s tech-heavy Kospi index fell 1.5 per cent and Hong Kong’s Hang Seng Tech index dropped 2.8 per cent.

The Vix, Wall Street’s so-called fear gauge that measures expected volatility on the blue-chip S&P 500 share index, rose as high as 38.94 points — its highest since January 2021, when the meme-stock craze rocked Wall Street.

Additional reporting by Jennifer Creery in Hong Kong and Leo Lewis in Tokyo

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