U.S. stocks were on pace to fall for a third straight week, continuing their slide to start 2022, with investors worried about the prospect of higher interest rates and their effect on valuations.
Investors’ largely expect that the Federal Reserve will raise interest rates several times this year to combat inflation, which has weighed on stocks. Last week, Fed Chair
Jerome Powell
called rapid inflation a “severe threat” to a full economic recovery. Data showed consumer prices soared to about a four-decade high in December. Even with the hikes, interest rates will remain near historic lows, which investors hope will buoy markets.
“The Fed is saying ‘OK, zero interest rates don’t make sense here, so we’re going to move back toward something more reasonable,’” said
Jonathan Golub,
chief U.S. equity strategist and head of quantitative research at Credit Suisse. “They’re not really hikes, but signals that a big rate of change is coming.”
Mr. Golub remains optimistic about equity markets, citing a year-end price target of 5200 points for the S&P 500, about 5.3% higher than Wall Street strategists’ average target.
All three major indexes were lower in late Friday trading. The S&P 500 was recently down 1.8%, while the Dow fell 1.3%. The Nasdaq Composite declined 2.5%, on pace for its worst week since March 2020. The S&P 500 is on track for its worst weekly performance since October 2020.
Japan’s Nikkei 225 index shed 0.9% Friday.
Photo:
behrouz mehri/Agence France-Presse/Getty Images
Cryptocurrencies tumbled, with bitcoin losing about 6.6% compared with its level 24 hours earlier, trading around $38,644. Ether fell 8.9%.
“All risk premium assets—crypto, high leverage, growth names—are being impacted, and what’s working right now is the opposite of that, quality stocks,” said
Jerry Braakman,
chief investment officer and president at First American Trust. He recommends that investors don’t buy the dip for tech stocks.
Aoifinn Devitt,
chief investment officer at Moneta, said higher yields will normalize the valuations of some tech stocks and make economically sensitive sectors of the market, such as utilities and real estate, more attractive. “By no means are we getting to a yield that is making equity markets look unattractive,” said Ms. Devitt.
Consumer staples rose as much as 0.4% Friday.
added 1.3%,
gained 1.4% and
advanced 0.6%.
Stay-at home stocks have come under pressure lately.
shares plunged 21% after the company said it expected a slowdown in subscriber growth.
rose 12.6%, recouping some losses after the stock tumbled nearly 24% Thursday on reports that the connected-fitness company was halting production. Its chief executive pushed back against the claims.
Ms. Devitt said it would be hard for companies like Netflix and Peloton to notch the same level of growth in 2022 as they did when the pandemic first started. Innovation will remain key for stay-at-home stocks if they want to trudge higher, she added.
Investors’ bets on faster rate increases have driven up inflation-linked bond yields, seen as a benchmark for financing costs. The yield on the benchmark 10-year Treasury note edged down to 1.754% from 1.833% Thursday. Tensions between Russia and NATO are also weighing on market sentiment, investors said.
“Geopolitical risk plays a role, repricing of [central bank] policy plays a role and the inflation mix in the sense of cost pressures. You put all those together and there is actually quite a change,” said
Georgina Taylor,
a multiasset fund manager at Invesco. “Risk premium for equities needs to go up.”
Oil prices also declined Friday. Global benchmark Brent crude fell 0.7%, trading at $87.77 a barrel, weighed down by a surprise increase in U.S. crude stockpiles, according to analysts at RBC Capital Markets.
Overseas, U.S.-listed shares of wind-power company
Siemens Gamesa Renewable Energy
fell 12% after it posted an operating loss and lowered its guidance, citing supply-chain constraints. Shares of some Chinese drugmakers surged after they were selected to help make cheaper versions of Merck’s Covid-19 pill.
BrightGene Bio-Medical Technology
rose 20%, and
advanced 14%.
Shares in Asia-Pacific and Europe broadly retreated. The pan-continental Stoxx Europe 600 fell 1.8%, while China’s Shanghai Composite Index and Japan’s Nikkei 225 declined 0.9%.
—Dave Sebastian contributed to this article.
Write to Hardika Singh at [email protected] and Anna Hirtenstein at [email protected]
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