The tech-focused index is down about 15 per cent since its November record, midway between the 10 per cent loss considered a correction and nearing the 20 per cent drop qualifies as a “bear market.” Image Credit: Bloomberg

Washington: Wall Street stocks tumbled again Friday following a plunge in Netflix shares that sent the Nasdaq further into correction territory, spurring questions of just how far the market will fall.

After a bruising session on European bourses, all three major US indices fell, led by the Nasdaq which lost 2.7 per cent on Friday alone.

The tech-focused index is down about 15 per cent since its November record, midway between the 10 per cent loss considered a correction and nearing the 20 percent drop that qualifies as a “bear market.”

“We’re still pretty far from a bear market, but if we start to see signs that higher interest rates are slowing the economy, you could easily pass from a correction to a bear market,” said Gregori Volokhine of Meeschaert Financial Services.

Friday’s session was dominated by the spectacular fall in Netflix, which ended with a loss of more than 20 percent after it projected it would add only 2.5 million subscribers in the first quarter of 2022, a sharp slowdown compared with earlier gains in the pandemic.

Netflix results “particularly spooked” technology-focused stocks on Friday, said Ross Mayfield, analyst at Baird.

“There’s a sense now that the consumer is kind of renormalizing their behavior and shifting spending to services,” he said.

That feeling “set off a chain reaction of what the next year to five years of consumer spending might look like versus what we would have thought beforehand.”

Fear factor

Stocks have been under pressure so far this year after the Federal Reserve shifted to a more restrictive monetary policy path that will include interest rate increases, with the first expected in March.

The Fed is scheduled to meet next week amid intensifying concerns about accelerating inflation that has spurred debate on how many times the central bank will raise the benchmark lending rate in 2022.

“The mood in the markets has been progressively getting worse recently as traders are preparing themselves for the prospect of the Federal Reserve hiking interest rates three or four times this year,” said David Madden at Equiti Capital.

CFRA Research still expects solid US growth in 2022, but recently trimmed its forecast slightly to 4.2 percent based on an outlook that includes four rate hikes, said chief investment strategist Sam Stovall.

The S&P 500, the most broad-based of the major indices, has fallen 8.3 percent from its last record.

Based on how stocks have historically responded to monetary policy shifts, Stovall estimates the S&P 500 could fall about 15 percent.

But a drop of twice that amount is also possible, depending on whether equities end up more or less generously valued compared with history, he said.

“The question is how scared investors are likely to be?” Stovall said. “But I don’t know the answer.”

Risk aversion dominates sentiment
Risk aversion dominated markets on Friday as stocks slumped on Wall Street and in Europe, oil prices fell from seven-year highs earlier in the week and bond prices surged with traders scurrying for the relative safety of government debt.
Concerns about how aggressively the Federal Reserve will tighten monetary policy shook investors, as did poor subscriber growth reported late Thursday at Netflix Inc cast a pall over the market and sent its shares plunging 21%.
The Nasdaq, the standout performer of the stock market boom since the pandemic began, has fallen more than 10 per cent from a November all-time high and is poised for its worst week since markets crashed in March 2020.
With expectations the Fed will raise interest rates up to four times this year and also reduce its balance sheet, fear of a hard landing has risen among investors.
But a slowing economy in the months ahead will probably give the Fed second thoughts, said Steven Ricchiuto, US chief economist at Mizuho Securities USA LLC.
"By the time we get to the second rate hike, everything will be rolling over enough that everybody will back off from these calls," he said. "The growth numbers will be slowing much more quickly than the Fed anticipated." U.S. Treasury and euro zone government bond yields fell as concerns about potential conflict in Ukraine also dented risk appetite and stock market drops increased demand for the debt.
The yield on 10-year Treasury notes was down 9.4 basis points to 1.740%, a sharp drop from a two-year high of 1.902% touched on Wednesday.
In Europe, the German, French and Italian indices fell almost 2 per cent, with the broad Euro STOXX index of 600 leading regional companies closing down 1.84 per cent. MSCI's all-country world index fell 1.37 per cent.
On Wall Street, the Dow Jones Industrial Average slid 1.20%, the S&P 500 fell 1.74% and the Nasdaq Composite lost 2.39%.
Markets in Asia were broadly lower, including in China where benchmark mortgage rates were cut on Thursday in the latest move to prop up an economy soured by its property sector.
But the sharpest drops in recent days have been in US markets, with the benchmark S&P 500 heading toward its worst month since late 2020.
-- Reuters