The US stock market has had its worst start to the year since the global financial crisis, as the threat of rising interest rates, slowing corporate earnings growth and geopolitical tensions have led to a fall in equities.
The S&P 500 fell 5.3% in January, its biggest monthly drop since the start of the coronavirus pandemic in March 2020 and the weakest January since the depths of the global financial crisis in 2009.
The blue-chip figure was on track for an even worse performance – last week approaching its worst January in history – to a 4 per cent recovery on the last two trading days of the month on Friday and Monday.
But even though they ended on a firmer footing, investors are preparing for greater volatility.
Heads of many assets of the fund manager Franklin Templeton, for example, usually meet once a month to adjust how much they allocate to different types of assets. But they decided to start meeting weekly to ensure they could respond quickly enough to volatility.
“This is going to be this type of year – we believe it will require a more agile approach to asset allocation,” said Wiley Tolet, Franklin Templeton Investments’ head of client solutions.
January sales began in the technology sector, where many companies could be adversely affected by rising interest rates. The Federal Reserve is sending hawks signals in response to spiraling inflation. Last week, Jay Powell, chairman, said the first rate hike in March would be almost certain, and declined to rule out an aggressive sequence of increases to follow.
Higher rates reduce the value that investors attach to future profits by hitting the prices of companies that advertise to investors with promises of long-term growth. The Nasdaq Composite Technology Index fell 9 percent, its worst decline in a month since November 2008.
As US companies report results for the fourth quarter, profit growth is also expected to slow after last year, when they were stimulated by comparisons with the weak 2020.
As investors have weighed on rising interest rates and slowing growth for months, the last few weeks have added an additional complication: the threat of war in Ukraine.
Geopolitical risks are known to be difficult to assess in stock markets, but several investors said growing tensions over a potential Russian invasion helped spread technology stocks to the wider market in the second half of January.
“The situation in Ukraine is what made it move from something that was really focused on interest rate sensitive areas to a risk sell-off,” said Tim Murray, a capital markets strategist at T Rowe Price.
Even without war, continued opposition, including potential sanctions against Russia, could further boost world energy prices at a time when economies are already struggling to curb inflation.
Sebastian Redler, head of the European strategy for equity participation in Bank of America, said that “Europe’s growth cycle seems particularly vulnerable because energy prices have risen so much that it will affect industrial activity.”
So far, however, European markets are performing slightly better than American ones, declining by 3.8% since the beginning of the year. The FTSE All-World Index fell 5.6 percent, its worst start to a year since 2016, when markets were rocked by growth concerns in China.
Once stocks began to fall, it was harder than usual for them to stop, according to Jack Caffey, portfolio manager at JPMorgan Asset Management.
Years of steady stock prices have discouraged portfolio managers from holding even small amounts of cash so as not to miss out on profits and criticisms of the risk of lower benchmark performance.
“Markets in the United States have become one-way by nature – momentum is a powerful thing,” Caffey said. “We have taken away the ability of people to be opposites. . . the less money you hold, the more your ability to take advantage of dislocations is challenged. “
And yet, despite the challenges, the mainstream US economy still seems to be in good shape. Corporate earnings growth may have slowed from last year’s peaks, but is still expected to remain positive for most large companies and investors are looking for opportunities amid instability.
Caffey of JPMorgan was among those who highlighted mature technology companies that they believe will be more resilient to inflation and could benefit from long-term trends such as growing demand for semiconductors rather than temporarily boosting their business from the era of the pandemic.
Others, including Murray of T Rowe Price, said they are focusing on smaller companies and “quality” stocks, which tend to have more stable profits and stronger balance sheets.
“Whenever you get a really sharp reaction in the market, some babies are thrown away with bathing water,” Murray said. “There are certainly some out there.”