S&P 500 slumps to low 4200s, down nearly 3% as fresh commodity price surge triggers renewed stagflation fears

US equities markets took a beating on Monday as a fresh surge in global commodity prices on Russia supply disruptions fears triggered fears of higher US inflation coupled with weaker growth against the backdrop of a tightening Federal Reserve. The S&P 500 cratered nearly 3.0%, dropping all the way back to the low 4200s from Friday’s close near 4330, with the bears eyeing a test of last month’s lows just to the north of the 4100 level. At current levels, trades more than 12.5% below the record highs it hit at the start of January above 4800, meaning the index is back to trading in “correction” territory (i.e. more than 10% below a recent major high).

The move lower in the tech-heavy Nasdaq 100 was even more outsized and perhaps exacerbated by a rise in US (nominal) bond yields as investors revised higher inflation expectations to reflect recent commodity market moves. The index dropped roughly 3.6% to fall into the 13,300s versus Friday’s close in the 13,800s. At current levels, the Nasdaq 100 looks set to close more than 20% below the record high it printed above 16,750 in November 2021, which would confirm that the index has fallen into “correction” territory.

The Dow’s losses were slightly more contained at just over 2.3% on the day, though the index did fall below the key 33,000 mark and is now more than 10% below its January record highs and also in correction territory. With fighting in Ukraine and subsequent Western sanctions on Russia, showing no signs of letting up and as various major commodities (oil, gas, some industrial metals, some agricultural products) continue to surge, difficult, choppy equity markets conditions look here to stay.

If inflation wasn’t already so high due to the pandemic (and fiscal/monetary response to it), recent events would likely have triggered a dovish shift in the Fed’s policy stance. But equity investors will on Thursday get a timely reminder that the inflation environment is anything but benign – the February Consumer Price Inflation report is expected to show the YoY rate nearing 8.0%. That should solidify expectations for the Fed to start a series of 25bps rate hikes (or perhaps faster later this year) later this month (not that there was really any doubt).

This week’s inflation reading won’t reflect any of the recent developments in global commodity markets. While base effects might see the YoY rate of inflation ease in the months ahead, the MoM rate is likely to accelerate. In such an environment, equity investors should not expect any Fed easing to come to the rescue any time soon. That is a key factor behind recent jitters.