S&P 500 eyes first correction since 2020 pandemic collapse

By Caroline Valetkevitch and Noel Randewich

NEW YORK/ SAN FRANCISCO Jan 24 (Reuters) - The S&P 500's 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.

Slammed by ongoing worries about inflation rates and by geopolitical fears related to Ukraine, the S&P 500 was last down 1.2%.

The index is now down about 9.5% from its Jan. 3 record high close, and if it closes down 10% from that date, it would confirm the index is in a correction, according to a widely used definition.

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 previously predicted.

Monday's rout stemmed from those concerns about the Fed, as well as by 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.

Bucking Monday's trend on Wall Street, the Russell 2000 index of small cap stocks gained about 1%, but remained down almost 20% 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.

The Nasdaq last week confirmed its fourth correction since the beginning of the pandemic, and is now down about 15% 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.

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

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

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.

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

(Reporting by Caroline Valetkevitch and Noel Randewich; Editing by Aurora Ellis)