S&P 500 craters below 4300 to hit lowest level since July, on course to confirm “correction” from record highs

US equity markets are trading sharply lower on Monday, with the S&P 500 index on course to confirm a “correction”, i.e. a close of more than 10% below the recent highs printed back in the first week of 2022. The index slumped below the 4300 level on Monday, to hit its lowest point since last July and is currently trading in the 4270s, down 2.8% on the day and down more than 10% since the start of the year.

The Nasdaq 100 index cratered 2.9% to hit the 14.0K level, taking its on-the-year losses to over 14.0% and its pullback from the November record highs to more than 16.0%. The Dow dropped 1.9% to fall into the mid-36K area, taking its on-the-year losses to 7.5% and losses versus recent record highs to just over 9.0%. The S&P 500 Volatility Index or VIX, meanwhile, continued its recent surge and surpassed its December “Omicron” high at 35.32 to nearly hit 38, its highest level since October 2020.

Driving the day

US equities are suffering from a double whammy of concerns over Fed tightening and concerns about the potentially imminent breakout of war in Eastern Europe. Regarding the former, markets are expecting a hawkish Fed to signal intent to hike interest rates multiple times this year, as well as reveal more details on potential quantitative tightening plans. The exact timing/speed of this tightening is hotly debated, with some analysts going as far as saying the Fed might even hike rates this week and then continue hiking rates at every meeting for the rest of the year.

That is probably a little over the top – since the pandemic, the Jerome Powell-led Fed has delivered clear forward guidance that it has largely stuck to and has been averse to wrong-footing markets. That should take a rate hike this week of the table. But momentum is clearly there for four, or maybe even more, rate hikes in 2022. The rapid shift in Fed direction (no one was talking about multiple 2022 rate hikes even as recently as November) has battered the cheap-money addicted sectors of US equity markets, such as the tech sector.

In terms of geopolitics, Western powers have been making moves to remove diplomats and their families from Ukraine in a signal that they anticipate a Russian invasion to be imminent. NATO leaders have also announced intentions to bolster troop presence in Eastern Europe, signaling fears that any potential conflict could spill across Ukrainian borders and into neighboring countries. Equity markets continue to watch the escalation in rhetoric/actions with concern and strategists note that Eastern European “war risk” could remain embedded in the price for some time.