Dow slumps 300 points and Nasdaq slips further as focus shifts to Fed and ‘tidal wave’ of omicron

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Losses for stock benchmarks on Wall Street deepened Monday, as worries about monetary policy and omicron undercut recent bullishness that brought the S&P 500 to a record close on Friday.

What’s happening
  • The Dow Jones Industrial Average
    DJIA,
    -0.89%

    retreated 313 points, or 0.9%, to 35,660.

  • The S&P 500
    SPX,
    -0.69%

    fell 0.6%, or 30 points, to 4,682, losing grip on a psychologically significant level at 4,700.

  • The Nasdaq Composite Index
    COMP,
    -1.06%

    was trading 0.9%, or 147 points, lower at 15,484.

Last week, each of the major indexes rose about 4%, with the S&P 500 closing at its 67th record high of 2021 on Friday. The benchmark U.S. index has gained 25% this year.

What’s driving markets

Markets were trading solidly lower Monday as investors sold energy, consumer discretionary and financial shares, with all eyes on the Federal Reserve’s final gathering of 2021 set for later this week.

Last Friday’s inflation reading helped to highlight rising pricing pressures in America, even if the core reading of inflation was showing some signs of receding.
The headline figure from Friday’s inflation report showed that the main index reached a 39-year high on a year-over-year basis, but there was relief that it was still below some traders’ worst-case scenario.

Investors are anticipating that Federal Reserve policy makers will announce a faster pace of tapering on Wednesday in response to rising prices, and analysts expect officials will pencil in enough rate hikes to take their main policy rate target to 2.5% by the end of 2024.

Read: Highest U.S. inflation in nearly 40 years will force Federal Reserve’s hand

“While investors might interpret the reversal of Fed policy as a bad harbinger, history shows that stock returns remain robust in the months leading up to and following the first rate increase,” said Jonathan Golub, chief U.S. equity strategist for Credit Suisse Securities.

“Over the past 4 cycles (’94, ’99, ’04, ’15), the S&P 500 gained 9.5% in the twelve months prior to the first hike, and 26.0% over the subsequent 3 years,” Golub wrote in a note Monday. “The real damage from higher rates tends to occur later in the cycle when tighter policy flattens/inverts the curve. We are far from that point.”

Besides the week’s flurry of central bank decisions, which also will include the Bank of England, the European Central Bank and the Bank of Japan, markets also will be focused on coronavirus headlines.

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Until Monday, investors had been opportunistically buying assets that got beaten down in a late-November selloff, but also are concerned about what the next phase of the recovery and economic growth might look like amid omicron and continued supply-chain woes, despite strength in U.S. employment.

“We expect inflation to stay higher for longer, and investors should consider a multi-asset approach that incorporates inflation-protected and floating-rate bonds, select equities, and real assets,” said Gargi Chaudhuri, head of iShares investment Strategy for the Americas at BlackRock Inc.

“Investors may need to be increasingly selective in their equity allocations, with a preference for value and quality, as well as industries with pricing power, such as semiconductors,” Chaudhuri wrote in a note.

In public-health news, U.K. Prime Minister Boris Johnson warned on Sunday night of a “tidal wave” of omicron infections and said England would quicken the pace of booster vaccinations.

Which companies are in focus
  • Apple Inc.’s
    AAPL,
    -0.64%

    recent share gains are pushing the iPhone maker closer to a $3 trillion market valuation milestone, even as shares fell 0.4% Monday.

  • Harley-Davidson IncHOG, said Monday its LiveWire electric-motorcycle business will go public by merging with special-purpose acquisition corporation AEA-Bridges Impact CorpIMPX, in a deal with a pro forma enterprise value of about $1.77 billion. Harley-Davidson shares rose 5.2%. AEA-Bridges shares advanced 2.5%.

  • Shares of Tesla
    TSLA,
    -5.53%

    were down 5.1% after the electric-vehicle maker’s CEO Elon Musk was named Time Magazine person of the year.

  • Pfizer IncPFE said Monday it has agreed to acquire Arena Pharmaceuticals IncARNA in a deal with a value of about $6.7 billion. Pfizer shares rose 5.3%. Arena Pharmaceuticals shares rose 80%.

  • Daimler Truck DTG surged 10.1% on Monday, its second day of trade following the spinoff from Daimler DAI

  • Navient CorpNAVI said Monday its board has approved a new $1 billion share buyback authorization. Its shares rose 2.2%,

  • Mattress company Tempur Sealy International Inc. TPX said Monday it has increased its share buyback authorization to $1.5 billion. Its shares rose 0.3%.

  • Eli Lilly & CoLLY said Monday it has entered a strategic collaboration with Foghorn Therapeutics Inc. FHTX for novel oncology targets using Foghorn’s proprietary gene traffic control platform. Eli Lilly shares rose 2.3%. Foghorn shares climbed 40.8%.

How other assets are trading
  • The Turkish lira
    USDTRY,
    -0.49%

    crashed against the dollar, as S&P warned it may downgrade Turkey’s debt rating. The Central Bank of Turkey responded by intervening in markets “due to unhealthy price formations in exchange rates.”

  • The yield on the 10-year Treasury note TMUBMUSD10Y was down 7 basis points at around 1.42% Monday, after rising about 14.5 basis points last week, according to Dow Jones Market Data. Treasury yields and prices move in opposite directions.

  • The ICE U.S. Dollar Index DXY, a measure of the currency against a half-dozen other monetary units, rose 0.1% Monday.

  • In oil futures, West Texas Intermediate crude CL00 for January delivery CLF22 edged up 0.2% to trade at $71.85 a barrel, following the strongest weekly gain since August.

  • Gold futures GC00 for February delivery GCG22 rose 0.2% to trade at $1,786.60 an ounce.

  • The Stoxx Europe 600 Index SXXP finished 0.4% lower on Monday, following a 2.8% weekly rise on Friday, while London’s FTSE 100 Index UKX closed 0.8% lower, following last week’s weekly climb of 2.4%.

  • In Asia, the Shanghai Composite Index SHCOMP closed 0.4% higher, after putting in a weekly gain of 1.6% on Friday, while the Hang Seng Index HSI fell about 0.2% in Hong Kong, following a 1% gain last week. China’s CSI 300 000300 rose 0.6%, after it surged over 3% for the week. Japan’s Nikkei 225 Index NIK closed up 0.7% after notching a 1.5% gain over the five-day period end last Friday. — Steve Goldstein contributed to this article

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