US stocks fell on Tuesday, deepening a global sell-off as investors worry that a long winning streak has pushed valuations too far.
With a drop of more than 1 per cent, the S&P 500 had its worst day since last August and the largest two-day loss since May, with highflying healthcare stocks leading the decline, following steep falls in Asia and Europe earlier in the trading day.
Sovereign bond prices came under further pressure, with the yield on the 30-year Treasury bond approaching 3 per cent for the first time since May.
The fall in US Treasury prices precedes the Federal Reserve’s latest policy statement and the Treasury Department’s quarterly refunding announcement, which are both set for release on Wednesday. Investors have already started to anticipate a more hawkish US central bank; the odds that the Fed will lift rates in four quarter-point hikes this year have risen rapidly over the past two weeks.
“Certainly there is fear over rising inflation and the effect it is having on the bond market. That is the easy bit,” said Nicholas Colas, co founder of DataTrek. “The hard bit is valuation — it leaves the market exposed to exactly what we are seeing today.”
Asian stocks recovered after an initial negative reaction on Wednesday, fuelled by concern that equity markets’ stellar start to the year was running out of steam after investors pumped a record amount into Asia and emerging markets funds.
Hong Kong’s Hang Seng index fell as much as 0.9 per cent at the start of trading, dropping from a record high on Monday, weighed down by a 1 per cent fall in the energy sector and a 0.7 per cent decline in real estate companies. The index, which includes Chinese tech giant Tencent, is still up 9.5 per cent so far this year, and was last trading up 0.4 per cent.
The Nikkei fell 0.5 per cent at the start of trade but has since recovered to be up 0.2%
“We’ve had a hell of a run in January and sooner or later we needed a pullback,” said Dave Lutz, the head of exchange traded funds trading at Jones Trading.
Accelerating global growth and US tax reform, seen by markets as boosting earnings, have driven gains in global bourses during January. But lofty valuations are challenging some portfolio managers, with market measures of price-to-earnings at their highest levels since the boom and bust of the dotcom era.
The declines in healthcare stocks also weighed on the three benchmark US stock indices, with the sector off more than 2 per cent after Amazon, Berkshire Hathaway and JPMorgan Chase said they would create a non-for-profit healthcare company to help contain their costs.
“Every investor knows what Amazon has done to retail and they are afraid the same thing will happen to healthcare,” Mr Colas said.
The S&P 500 and Dow Jones Industrial Average both closed more than 1 per cent lower, while the technology-heavy Nasdaq Composite lost 0.9 per cent.
Combined with its 0.7 per cent drop on Monday, the S&P 500 posted a 1.76 per cent two-day decline — its worst since last May. The losses punctuate what has otherwise been a stratospheric run by global stocks, in which the FTSE All-World index enjoyed its best start to a year since 1987.