Just as a worrying new variant of the coronavirus has begun to spread, the Federal Reserve chair signaled on Tuesday that the central bank could reduce its support for the economy more quickly, sending a shudder through Wall Street and pushing the S&P 500 negative for November.
A sell-off already in progress accelerated after the chair, Jerome H. Powell, told a Senate committee that inflation was likely to persist well into next year and that the Fed would consider tapering off its purchases of government bonds “perhaps a few months sooner” than previously expected.
The bond-buying program has been a crucial factor in the swift rise of stocks since the start of the pandemic — the S&P 500 has more than doubled since March 2020 — and the market’s response to Mr. Powell’s comments was immediate. The benchmark index fell sharply and closed down 1.9 percent.
“I think it’s a major moment,” said Nathan Koppikar, a portfolio manager at the San Francisco hedge fund Orso Partners, which often places bets that certain stocks will fall. “The Fed is finally sort of putting their stake in the ground and saying that the bubble has gone on long enough.”
As the S&P 500 struck bottom in March 2020, the Fed was restarting the type of money-printing program, known as quantitative easing, that it put in place because of the financial crisis of 2008. The central bank pumped trillions of dollars into the financial system by purchasing assets such as Treasury bonds with newly created dollars — a key source of momentum for the seemingly relentless rally in share prices.
That program was never going to last forever, however, and this year the Fed began to discuss dialing back its bond purchases. After some jitters this fall, investors seemed to have come to grips with the Fed’s plans. But Mr. Powell’s statements about possibly responding to persistent inflation — which the central bank had long described as “transitory” — with more aggressive tapering amounts to a significant milestone.
“The retiring of ‘transitory’ means we’re also retiring quantitative easing, which has overstayed its welcome,” said Rick Rieder, the head of the global allocation investment team at the money management firm BlackRock in New York.
Without a regular influx of newly created dollars into capital markets, stocks could be in for a rockier run than they’ve had in more than a year. “Volatility will be higher,” Mr. Rieder said.
An earlier end to the Fed’s bond-buying program could be a tacit signal of a sooner-arriving increase in interest rates. Short-term bond yields, which are heavily influenced by expectations for Fed rate increases, spiked on Tuesday. The yield on the two-year Treasury note rose to 0.56 percent from roughly 0.43 percent in relatively short order, but some of that surge melted away through the afternoon, and the yield ended the day at roughly 0.52 percent.
Stock prices were falling around the world before Mr. Powell’s testimony as investors struggled to understand the danger posed by the Omicron variant, which began roiling markets last week. The Stoxx Europe 600 closed down 0.9 percent; in Asia, the Nikkei 225 in Japan and the Hang Seng in Hong Kong each dropped more than 1.5 percent.
Concerns about potential economic damage from the variant, such as restrictions on travel, hammered crude oil prices again on Tuesday. Futures prices for benchmark American crude tumbled more than 4 percent, and were down roughly 20 percent since the start of November.
Taken at face value, such a sell-off implies that investors see growing risks that the Omicron variant will set off a global economic slowdown. But some investors think the prices are likely to reverse.
“Is there really a reason for oil to be trading down to 66 bucks a barrel when we were up north of $80? Are we literally locking down the entire global economy?” asked Jack Janasiewicz, a portfolio manager with Natixis Investment Managers. “It’s an overreaction.”
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Investors remain particularly attuned to the effectiveness of vaccines against the new variant. The chief executive of Moderna, a vaccine maker, said in an interview on Tuesday that there could be a “material drop” in the effectiveness of current vaccines to Omicron. The executive, Stéphane Bancel, told The Financial Times that it might be months before an Omicron-specific vaccine could be produced at scale, and he added that it would be risky to shift the company’s entire vaccine production while other variants were still prevalent.
Financial markets have been unsteady since the identification of the Omicron variant in southern Africa late last week. The S&P 500 had its worst day since February on Friday, dropping 2.3 percent. On Monday, it recovered some ground as politicians around the world cautioned against panic, but Tuesday’s fall more than wiped out those gains.
Despite the swings of recent days, investors sit on solid gains this year. The S&P 500 is up more than 21 percent in 2021 — and that could be reason for the sell-off to worsen next month, as investors try to preserve their gains for the year in the face of growing concerns about what lies ahead.
“You have uncertainty around Covid. You’ve got uncertainty around inflation, uncertainty around global central bank policy,” said Daniel Ivascyn, the group chief investment officer at PIMCO, a large fund manager based in Newport Beach, Calif. “Any one of these things may not be enough to derail the rally, but all of these issues combined with bad year-end liquidity certainly can lead to some significant downside.”
Still, investors say the Omicron variant is unlikely to trigger the same kind of response from governments, business or individuals that the virus did when it first emerged. Even if Omicron is a greater threat than the Delta variant before it, investors expect its effect on the market to be less severe than the nearly 34 percent crash in share prices between February and March 2020.
“The worst case is not March 2020 again,” said Jeb Breece, a principal at Spears Abacus, an independent money management firm in Manhattan. “Fear and unknowns were such a big component of that. I don’t see us doing that again.”
Coral Murphy Marcos contributed reporting.