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Jan. 19, 2022, 4:38 p.m. EST

Nasdaq ends in correction territory for first time in 10 months, stocks tumble as Wall Street girds for inflation battle

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By Joy Wiltermuth and Mark DeCambre

U.S. stock benchmarks finished lower Wednesday, with the Nasdaq Composite booking its first close in correction territory since March, as sharply higher bond yields and elevated inflation rattle investors.

Banks stocks were again in the spotlight, with Morgan Stanley and Bank of America reporting quarterly results.

How did stock indexes fare?

  • The S&P 500 index /zigman2/quotes/210599714/realtime SPX +1.45% shed 44.34 points, or 1%, ending at 4,532.77, led by declines in consumer discretionary /zigman2/quotes/210600228/delayed XX:SP500.25 +2.20% and financials /zigman2/quotes/210599854/delayed XX:SP500.40 +2.18% .

  • The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +2.12% fell 339.82 points, or 1%, finishing at 35,028.65.

  • The Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +1.07% lost 1.2%, or 166.64 points, closing at 14,340.26, or below its  correction level at 14,451.69 . The technology-laden index last closed in correction on March 8, 2021.

On Tuesday , stocks fell sharply, with the Nasdaq Composite tumbling 2.6% to finish below its 200-day moving average.

What drove markets?

Markets tumbled into the closing bell Wednesday in another session of volatile trade, a potential sign of the “new normal” for equities, as the Federal Reserve looks to tighten financial conditions and tamp down inflation.

“I don’t think it’s going to be a short-lived bout of volatility,” said Matt Peron, Janus Henderson’s director of research, in a phone interview. “There’s a lot policy normalization that has to happen. There are a lot of changes in investors’ thinking that needs to happen, and those typically take time.”

While Peron said he’s “constructive on the long term” for stocks, he also expects the next three to six months to be choppy as the Fed looks to rein in easy monetary conditions unleashed during the pandemic.

Surging Treasury yields have weighed on the market’s bullishness, particularly hitting yield-sensitive technology and other growth equities hard. The yield on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +1.12% on Wednesday was at around 1.826%, pulling back somewhat, after reaching highs not seen since early 2020.

Read: Stock-market warning signal: Here’s what surging bond yields say about S&P 500 returns

The yield on the 2-year Treasury note  /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y +1.03% , more sensitive to Federal Reserve policy expectations, fell 1.6 basis points to 1.022%, after hitting its highest level since February 2020.

“There is concern that…the Fed is not easing into monetary policy normalization because it is so far behind the curve,” Invesco’s chief global market strategist, Kristina Hooper, told MarketWatch.

She also sees inflation, which the Fed now plans to fight, as weighing on the stock market. “In a number of the earnings calls, we are hearing about expenses going up…we’re hearing about compensation going up,” Hooper said, noting that wage inflation tends to be longer-lived.

The Fed is scheduled to meet next Tuesday and Wednesday, though many think January will be too soon to pencil in the first interest-rate hike of the year. Federated Hermes’ Philip Orlando expects four rate hikes this year, starting in March, each in 25-basis-point increases, even through others have begun calling for a series of 50-basis-point hikes to help “get the inflation genie back in the bottle.”

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