S&P 500 eyes first correction since 2020 pandemic collapse

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., January 6, 2022. REUTERS/Brendan McDermid

NEW YORK/ SAN FRANCISCO Jan 24 (Reuters) - The S&P 500's early tumble on Monday put the world's most-followed stock index within reach of confirming its first correction since the 2020 collapse in global markets brought on by the coronavirus pandemic.

The S&P 500 slumped (.SPX) as much as 4%,slammed by ongoing worries about rising interest rates and geopolitical fears related to Ukraine. The index was more than 10% below its Jan. 3 record high close before bouncing back to end the session with a daily gain of 0.3%. read more

It is now down 8.1% from its record. A correction would be confirmed if the index closes 10% or more below its record closing level, according to a widely used definition.

Index losses of 10% or more from record highs

Wall Street has reeled in recent months from spiking inflation and growing expectations the U.S. Federal Reserve will tighten monetary policy more quickly than expected. Monday's early rout stemmed from those concerns, as well as an announcement by NATO that it was putting forces on standby to prepare for a potential Russian incursion into Ukraine.

"Investors have gotten spooked because nobody really knows what (Fed Chairman) Jay Powell will do. Will he hike three times, four times, five times?" said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, Texas.

The Russell 2000 index of small cap stocks <.RUT> was down more than 20% below its November record closing high Monday before reversing course.

The Russell index ended up 2.3% on the day but remains down about 17% from its November record high following several weeks of steady declines. A close of 20% or more below its record closing high would confirm the index is in a bear market.

Hitting those low levels early in the session may have triggered some buy signals, said Jake Dollarhide, chief executive officer of Longbow Asset Management in Tulsa, Oklahoma.

"The small cap Russell 2000 hitting 20% down (from its record) might have been a bigger indicator than anything," he said.

The Nasdaq (.IXIC) last week confirmed its fourth correction since the beginning of the pandemic, and is now down about 14% since its November record closing high.

Rising interest rates tend to disproportionately harm shares of high-growth companies because investors value them based on earnings expected years into the future, and high interest rates erode the value of future earnings more than the value of earnings made in the short term.

The Nasdaq and Russell 2000 have lagged the rest of the market because they have more stocks with higher multiples, said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.

Steven DeSanctis, equity strategist at Jefferies, wrote in a recent note that small caps "are pricing in a chance of a recession."

"High-yield spreads have not budged, nor have '22 earnings estimates, yet relative valuations are as cheap as they were in '20," he noted.

Following this month's decline in the S&P 500, the index is trading at about 21 times expected earnings, still far above its 10-year average of about 17, according to Refinitiv data.

S&P 500 forward P/E is far above its historical average

Energy (.SPNY) is the only one of 11 S&P 500 sector indexes with a gain year to date, up about 13%. Consumer discretionary <.SPLRCD> and technology <.SPLRCT> have been the worst performers in 2022, both down about 11%.

S&P 500 component performance so far in 2022
Reporting by Caroline Valetkevitch and Noel Randewich; Editing by Aurora Ellis and David Gregorio

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