Was the Market Sell-Off Overdone?

What just happened?

So far, 2022 is off to a rocky start for the stock market. Yesterday, after an initial plunge in which stocks dropped as much as 4 percent — the biggest one-day drop in nearly a year — the market rallied and ended the day with a slight gain. At one point, the S&P 500 was in a correction, a decline of 10 percent from a recent peak, for the first time since the start of the pandemic. And then it wasn’t.

What gives?

“There was no news or Fed commentary to speak of,” Michael Antonelli, a strategist at Baird, told DealBook of Monday’s turnaround. “It’s a super-hard question to answer, like asking why the momentum changes in a sporting event.” John Canavan, an analyst at Oxford Economics, said that “the sell-off was overdone and it had to do more with a panicky decline than it had to do with any rational adjustment to economic or Fed expectations.”

The foundations supporting the market during the pandemic are looking less stable. That starts with the Fed, which has flooded the market with money and kept interest rates low. The unwinding of this stimulus is preoccupying market watchers, who are looking to the central bank this week for clues about its intentions (more on that below). Rising interest rates, combined with uncertain corporate earnings prospects and geopolitical tensions between Russia and Ukraine, form an “investor triple-whammy,” Ben Laidler of eToro wrote in a research note.

Futures are falling this morning, suggesting another nervy start to trading. Here are three of the things that are worrying investors before the markets open for what looks like another eventful session:

• Interest rates are proving hard to predict. The Fed has indicated it is likely to raise rates soon to bring down high inflation. That’s not necessarily a bad thing, if it tames inflation without denting corporate profits or dampening consumer demand too much. But long-term interest rates, despite the expected moves from the Fed, have fallen in recent days. That suggests expectations for long-term economic growth may be dropping.

• Tech stocks look vulnerable.Half of the stocks in the Nasdaq 100 have dropped more than 20 percent from 52-week highs. Earnings growth is slowing, and not even the big-cap tech giants — major winners during the pandemic — are bucking the trend, with expectations for higher interest rates making growth-oriented companies less attractive. Microsoft, which reports its latest results later today, is expected to tell investors that its profit growth is slowing, a trend analysts expect to continue in the coming quarters. The same applies to Apple, which reports its results on Thursday. Apple and Microsoft make up more than 10 percent of the S&P 500 index.

• Geopolitical tensions add uncertainty. Fears of a conflict between Russia and Ukraine are rising. This would threaten the energy supply in Europe, which is already coping with soaring natural gas prices, rattling companies that do business there.

Some see a benefit to letting a little air out of inflated market valuations. “We haven’t had a correction in a long time,” said Lindsey Bell, the chief money and markets strategist at Ally Invest. Sell-offs like the one in the first half of the day yesterday may be uncomfortable, she said, but the sooner a drop happens, “the earlier and the more likely you are to make up that lost ground before year-end.”

HERE’S WHAT’S HAPPENING

Four attorneys general sue Google over tracking users. The District of Columbia and Indiana, Texas and Washington claimed that the tech giant deceived users by continuing to use their location information even after they changed privacy settings to prevent such tracking.

A challenge to affirmative action reaches the Supreme Court. Justices agreed to decide whether race-conscious admissions programs at Harvard and the University of North Carolina are constitutional. Legal experts say the court’s conservative supermajority will likely view the program with skepticism, casting doubt on the future of affirmative action in higher education more generally.

A New York judge blocks the state’s mask mandate. The rule requiring masks at all indoor public places was enacted unlawfully because it hadn’t been approved by state lawmakers, the judge ruled. In other coronavirus news, France has begun barring unvaccinated people from restaurants and sports venues, and public transportation data in London show that ridership is up as pandemic restrictions lift.

Unilever plans to cut 1,500 management jobs. The consumer products giant announced a broad reorganization of its business amid pressure from investors to improve its performance. In addition to the layoffs, Unilever will split its food business in two, potentially signaling plans to sell more brands.

Google hires a McKinsey senior partner to study tech’s effects on society. James Manyika, the chairman of the McKinsey Global Institute and a longtime adviser to Silicon Valley companies, will become the tech giant’s senior vice president of technology and society. He’ll report to Alphabet’s C.E.O., Sundar Pichai.

What Fed watchers are watching

The Fed’s latest policy meeting, which starts today and concludes tomorrow, comes as inflation remains high, markets look jittery and signs of economic stress are emerging.

The Fed chairman, Jay Powell, who will announce the bank’s policy decisions tomorrow, has suggested recently that inflation is his main concern. Goldman Sachs economist David Mericle wrote in a note to clients that the Fed will look to tighten “at every meeting until the inflation picture changes.” Few expect the Fed to raise interest rates this week, but the first increase could come as soon as March, and the path of tightening after that will depend on several issues:

• Inflation: A debate remains over whether high inflation is the result of a hot economy or snarled supply chains. If pandemic disruptions are the main culprit, interest rate increases could make the problems worse.

• The pandemic: The Omicron variant’s spread likely slowed the economy recently. Some believe the number of employed people is likely to drop in January, the first time that has happened in more than a year. If the latest surge convinces consumers that Covid will continue to come back in waves, they may stop spending. But if Omicron, like earlier variants, merely delays spending, the Fed may want to act ahead of the next surge in prices.

• Consumer debt: Even if the inflation debate isn’t settled, the Fed may still think it is time to raise interest rates. Cheap loan rates have led American consumers to take on more housing and auto debt. The recent run-up in housing prices, and related concerns about affordability, could be enough to make the Fed want to raise interest rates sooner rather than later.

“Many things which are not necessarily good or useful to people — or even working — are getting a lot of attention.”

— Artur Sychov, the founder and C.E.O. of Somnium Space, on the hype surrounding metaverse ventures. (He conducted his interview with Vice inside his company’s virtual world to show how advanced it was relative to competitors.)

Exclusive: Down the crypto rabbit hole with Adam Dell

Domain Money, a stock and crypto investment app started by Adam Dell, the serial tech entrepreneur and former Goldman Sachs partner, is launching today, DealBook is first to report. The app addresses a gap Dell perceived in the market while he was at Goldman: the lack of guidance for investors navigating the “the noise and confusion of crypto.” (The price of Bitcoin has fallen by nearly 50 percent from its November peak.)

Dell, the brother of Michael Dell, told DealBook that he identified problems while working “in the bowels of the financial system.” He was drawn to blockchain technology — the distributed ledgers underlying cryptocurrencies — after Goldman bought his finance app Clarity Money in 2018 and it became part of Marcus, Goldman’s personal finance service. Dell left the bank last year, convinced that “it is inevitable that blockchain will become the operating system of the global financial system” and that mainstream investors need help navigating this new space, he said.

Domain Money believes that investors in digital assets will pay for insights, data and professional help from a team with its roots in Goldman. (Dell took 25 of the bank’s employees with him to the new venture.) Customers can “have their hands held if they want,” Dell said, by calling to speak with live agents. They can also access information that isn’t otherwise available, like “social sentiment” scores based on online chatter. “We’ve gone really deep down the rabbit hole,” Dell said.

Rest assured, Robinhood: Domain Money isn’t angling for your customers. Robinhood brought millions of new investors into markets by offering fee-free trading, but Domain Money sees its competition as online brokerages like E-Trade, Charles Schwab and Fidelity, which may offer exposure to crypto but not direct trading.

Domain Money has raised $33 million from investors, including Bessemer Venture Partners and the Salesforce founder Marc Benioff. Notably, its advisory team includes Christopher Giancarlo, the crypto-friendly former chairman of the C.F.T.C., and Dell says that one of the app’s selling points is that the team is “very familiar and comfortable with compliance and regulations.”

THE SPEED READ

Deals

• Nvidia has reportedly told business partners that it doesn’t expect its $40 billion deal for the computer chip maker Arm to close, amid scrutiny from regulators. (Bloomberg)

• Sony Music bought Bob Dylan’s recorded music catalog, worth potentially about $200 million. (NYT)

• Credit Suisse warned that its investment bank lost money in the fourth quarter, as its trading business suffered. (FT)

• Jonathan Kanter, the Justice Department’s antitrust chief, said he favors filing lawsuits to block deals, instead of striking settlements that he says often have “significant deficiencies.” (Bloomberg)

• Tesla countersued JPMorgan Chase in a dispute over a 2014 debt offering. (WSJ)

Policy

• House Republican leaders have reportedly discussed making bans on lawmakers’ trading in individual stocks a campaign issue for the midterm elections. (CNBC)

• “The Rise of the Crypto Mayors” (NYT)

• The Supreme Court will hear a case that could limit the Environmental Protection Agency’s powers under the Clean Water Act. (WaPo)

• Amazon and Meta spent record sums on federal lobbying last year — about $20 million each — as they sought to beat back efforts to curb their market power. (The Hill)

• A fight over rooftop solar panels could endanger California’s goal of relying only on clean energy by 2045. (NYT)

Best of the rest

• Amazon is seeing an exodus of employees, over concerns about compensation, work culture and more. (Bloomberg)

• Is the jobs boom leaving men behind? (Bloomberg Opinion)

• Starting next year, Lamborghini will only produce cars with electric or hybrid engines. (Electrek)

• Neil Young demanded that Spotify remove his music from its platform to protest Joe Rogan spreading coronavirus misinformation in his podcast. (Rolling Stone)

• Separately, Spotify is hiring staff to help Prince Harry and Meghan, the Duchess of Sussex, produce more podcasts to fulfill the terms of their $30 million content deal. (The Sun)

We’d like your feedback! Please email thoughts and suggestions to [email protected].