Stocks bounced for a second day Monday to wrap up a rough January, as investors snapped up some of the tech shares that have been battered all month.
Despite the two-day relief rally, both the S&P 500 and the Nasdaq Composite posted their worst months since the onset of the pandemic, as investors braced for the Federal Reserve to raise interest rates multiple times this year starting soon.
The S&P 500 rose 1.8% on Monday to 4,515.55, cutting its loss for the month to 5.2%. That’s still its worst month since the 12.5% loss in March 2020, and its worst January since 2009. The Dow Jones Industrial Average added 406 points, or 1.1%, to reach 35,131.86. That helped it cut its loss for the month to 3.3%, as it benefitted from its underweighting in tech shares.
The tech-heavy Nasdaq Composite rose 3.48% to 14,239.88, and added to its 3% comeback Friday. The index is still ended down 8.9% for January, also its worst month since March 2020.
“Between the amount of volumes that we saw and the massive swings that we saw in markets, the volatility really felt like it had a crescendo,” Art Hogan, chief market strategist at National Securities, told CNBC.
“Crescendos usually happen when you’ve got a massive amount of capitulation and everything is for sale,” Hogan added. “For most of the month we would see money coming out of growth but going into cyclical. Then that would unwind and growth would catch a bit. That was all true until this past week. We’ve seen a bit of the aftermath of that storm, and that seems to be more stabilization.”
Last week, the Federal Reserve indicated that it is likely to raise interest rates for the first time in more than three years to combat historically high inflation. Markets are now pricing in at least five quarter-percentage-point interest rate hikes in 2022.
Tech shares have been the hardest hit stocks in January, as investors fear higher rates will expose their lofty valuations and raise their operating costs. Investors were rethinking that notion a bit as the month ends, especially after a dramatic pullback in the stocks.
Netflix and Spotify surged more than 13% and 11%, respectively, on Monday upgrades from Citi. The firm cited this month’s pullback as an attractive time to buy. Netflix is still down nearly 30% this month, and Spotify is off by 17%.
Tesla, which is down 11% in January, gained more than 10% on Monday after Credit Suisse upgraded the electric car maker’s stock. The firm said Tesla had been unfairly caught up in the market decline. Other EV makers rose too, with Rivian and Lucid adding about 11% and 6%, respectively.
Nvidia shares climbed 7% after being hit hard in January. The chip stock finished the month down 16.7%.
Outside of tech, Boeing was the top gainer in the Dow, rising 5% after the airline won a deal with Qatar Airways worth $34 billion.
MKM Partners chief market technician JC O’Hara emphasized in a note Monday that while market bottoms aren’t single-day events and there’s still a 30% chance new lows could form, investors should trust the bottoming process.
“We continue to believe the economic conditions are favorable and the recent weakness is not a systematic problem, but rather a valuation reset due to the swift change with investors’ expectations for the future path of rates,” O’Hara said. “A shock, not a top.”
The S&P 500 at one point this month had dipped into correction territory on an intraday basis, but the recent comeback has pared the loss from its all-time high to just under 7%. The Nasdaq Composite is still off by 13% from its high, firmly in correction territory.
Jim Paulsen, Leuthold Group chief investment strategistm, noted that “forcing some panic-selling and exhausting the most emotional investors” is the first step in ending a correction and stabilizing the market.
“It would not be shocking if there is a test of last Monday’s intra-day low, and if it fails, the market will probably head lower,” Paulsen added.
It hasn’t been a straight trip downward. The major averages experienced violent swings last week, with the Dow moving a gut-wrenching 1,000 points in both directions. The Dow ended the week 1.3% higher. The S&P 500 gained 0.8% last week and the Nasdaq was about flat for the week.
“This all kind of results in additional market volatility until investors digest this transition period,” said Michael Arone, chief investment strategist at State Street Global Advisors. “On the other side of this, the economy should continue to expand, earnings are pretty good. That’s enough to sustain markets, but I think they’re adjusting to the shift in monetary policy, fiscal policy and earnings.”
Over the weekend Atlanta Fed President Raphael Bostic told the Financial Times the central bank isn’t ruling out raising interest rates by half a percent, versus the typical quarter-point move, if inflation remains high. He himself is calling for three quarter-point interest rate increases in 2022, starting in March, he said, adding that a more aggressive approach could be necessary depending on how economic data evolves.
Investors have a big week ahead for economic data and some important earnings reports from some of the market’s biggest tech names, including Alphabet, Meta Platforms, Amazon and more. About one-third of S&P 500 companies have reported fourth-quarter earnings and 77% have beaten Wall Street’s earnings expectations, according to FactSet.
–CNBC’s Patti Domm contributed to this report.