Stocks falling to start year of great expectations

U. S. stocks pulled back from their recent record highs Monday, as big swings return to Wall Street at the onset of a year where the dominant expectation is for a powerful economic rebound to sweep the world.

The S& P 500, which ended 2020 at an all-time high, slid 1.5% after earlier dropping as much as 2.5%. It was the benchmark index’s biggest decline since late October. Technology companies accounted for a big share of the sell- off, along with industrial, communication services, health care and other stocks. Only the S&P 500’s energy sector managed to eked out a gain.

The selling comes as coronavirus cases keep climbing at frightening rates around the world, threatening to bring more lockdown orders that would punish the economy. The worsening numbers also raise the possibility that Wall Street has been overly optimistic about the big economic recovery it sees coming because of COVID-19 vaccines. Tuesday’s upcoming runoff elections to determine which party controls the Senate may also be contributing to the volatility.

“We’ve got a wobbly start to the year here,” said Lindsey Bell, chief investment strategist at Ally Invest. “Investors are looking for a reason to lock in profits. The selling is probably a bit overdone.”

The S&P 500 fell 55.42 points to 3,700.65. The Dow Jones Industrial Average also fell from its record set last week, shedding 382.59 points, or 1.3%, to 30,223.89. At one point, it was down 724 points. The tech-heavy Nasdaq composite lost 189.84 points, or 1.5%, to 12,698.45.

Small company stocks, which have been notching solid gains in recent weeks, also fell. The Russell 2000 index of smaller companies dropped 28.94 points, or 1.5%, to 1,945.91.

Treasury yields held relatively steady after giving up a healthy gain in the morning. Gold jumped 2.7%, while the price of U.S. crude oil fell 1.9%.

Stocks also fell in Japan as officials there mull a state of emergency due to surging virus cases. But optimism was more prevalent in other markets, with European and most Asian indexes closing higher.

The United Kingdom has been hit particularly hard by a new variant of the coronavirus that appears to be more contagious. On Monday, the United Kingdom became the first nation to start using the COVID-19 vaccine developed by Oxford University and drugmaker AstraZeneca.

In the United States, regulators have already approved two other vaccines. China last week gave the greenlight for its first domestically developed vaccine. Others are also being tested.

Investors have been hoping that vaccines will allow daily life around the world to slowly return to normal. That’s helped spark a recent recovery for stocks of travelrelated businesses, smaller companies and other industries left behind for much of the pandemic.

Still, rising coronavirus cases, the emergence of a mutant variant of the virus and concerns that the rollout of the vaccine isn’t happening fast enough are keeping investors on edge, said Adam Taback, chief investment officer for Wells Fargo Private Bank.

“The (virus), the severity of the impact it’s going to have during the winter, is still weighing on people’s minds,” Taback said.

Even though infection rates and hospitalizations are at frightening levels, many investors have been betting that ultralow interest rates provided by the Federal Reserve and financial support for the economy recently approved by Congress can help tide the economy over until vaccinations become more widespread.

G over nment s mi g ht throw less stimulus at their economies than last year, but policy is “still at a very loose setting,” which supports stock prices and lending, said Kerry Craig of JP Morgan Asset Management in a report.

“Investors should look through the bumpier start to the new economic cycle and focus on the improved earnings outlook,” Craig said.

Of course, many risks remain for the market, even beyond the threat of economic lockdowns coming in the near term because of the raging pandemic. Prices have climbed enough that critics say stocks may be too expensive, particularly if the big rebound in corporate profits that investors expect to occur later this year doesn’t materialize.

Politics is also still a wild card. If Democrats sweep the two runoff races in Georgia, that could lead to higher corporate tax rates, tighter reg ulations and other changes from Washington that would hinder corporate profits. Democrats already control the House, and President-elect Joe Biden is a Democrat.

“The concern around that is regulatory risk and tax policy risk are back on the table,” Bell said. “That has investors feeling a little bit anxious.”

But even in a Democratic sweep, markets see some causes for upside, including the potential for more stimulus for the economy. Democrats have been lobbying for $2,000 payments to go to most individuals, for example.