Stocks and bond yields take a beating as COVID fears flare again.
NEW YORK — Resurgent pandemic worries knocked stocks lower from Wall Street to Sydney on Monday, fueled by fears that a faster-spreading variant of the coronavirus may upend the economy’s strong recovery.
The Standard & Poor’s 500 index fell 68.67 points, or 1.6%, to 4,258.49 after setting a record just a week earlier. In another sign of worry, the yield on the 10-year Treasury touched its lowest level in five months as investors scrambled for safer places to put their money.
The Dow Jones industrial average slumped 725.81 points, or 2.1%, to 33,962.04, while the Nasdaq composite lost 152.25 points, or 1.1%, to 14,274.98.
Airlines and other companies that would get hurt the most by potential COVID-19 restrictions took some of the heaviest losses, similar to the early days of the pandemic. United Airlines lost 5.5%, mall owner Simon Property Group fell 5.9%, and cruise operator Carnival gave up 5.7%.
The selling was global, with several European markets sinking roughly 2.5% and Asian indexes down a bit less. The price of benchmark U.S. crude, meanwhile, sank more than 7% after OPEC and allied nations agreed on Sunday to eventually allow higher oil production this year.
Increased worries about the virus may seem strange to people in parts of the world where masks are coming off thanks to COVID-19 vaccinations. But the World Health Organization says cases and deaths are climbing globally after a period of decline, spurred by the highly contagious Delta variant. And given how tightly connected the global economy is, a hit anywhere can quickly affect businesses on the other side of the world.
Experts say Indonesia has become a new epicenter for COVID-19 as outbreaks worsen across Southeast Asia. Meanwhile, some athletes have tested positive at Tokyo’s Olympic Village, with the Games set to open Friday.
Even in the United States, where the vaccination rate is generally higher, people in Los Angeles County once again must wear masks indoors regardless of whether they’re vaccinated after surges in cases, hospitalizations and deaths.
Across the country, the daily number of COVID cases has soared by nearly 20,000 over the last two weeks to about 32,000. The vaccine campaign has hit a wall, with the average number of daily inoculations sinking to the lowest levels since January. Cases are on the rise in all 50 states.
Localized coronavirus surges are starting to affect heavily unvaccinated communities in places such as Missouri and Arkansas, where hospitals are running out of space again. Almost all of the hospitalized COVID patients are unvaccinated. More than 68% of the U.S. adult population has received at least one dose of vaccine and 59% are fully vaccinated. And about a dozen states have yet to vaccinate 40% of their population.
That’s why markets are concerned, even though reports show the economy is still recovering at a fantastically high rate and the general expectation is for it to deliver continued growth. Any worsening of virus trends threatens the high prices that stocks have achieved on expectations the economy will fulfill those lofty forecasts.
Financial markets have been showing signs of increased concerns for a while, but the U.S. stock market had remained largely resilient.
The S&P 500 has had just two down weeks in the last eight, and the last time it had even a 5% pullback from a record high was in October.
Several analysts pointed to that backdrop of high prices and very calm movements for weeks while dissecting Monday’s drop.
“It’s a bit of an overreaction, but when you have a market that’s at record highs, that’s had the kind of run we’ve had, with virtually no pullback, it becomes extremely vulnerable to any sort of bad news,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “It was just a matter of what that tipping point was, and it seems we finally reached that this morning ” with worries about the Delta variant.
He and other analysts are optimistic stocks can rebound quickly. Investors have been trained recently to see every dip in stocks as merely an opportunity to buy low. Plus, the general expectation is still for the economy to continue growing.
Barry Bannister, chief equity strategist at Stifel, was more pessimistic. He said the stock market may be in the early stages of a drop of as much as 10% after its big run higher. The S&P 500 nearly doubled after hitting its bottom in March 2020.
“The valuations, they just got too frothy,” he said. “There was just so much optimism out there.”
The bond market has been louder and more persistent in its warnings. The yield on the 10-year Treasury tends to move with expectations for economic growth and for inflation, and it has been sinking since late March, when it was at roughly 1.75%. It fell to 1.19% on Monday from 1.29% late Friday.
Analysts and professional investors say a long list of reasons is potentially behind the sharp moves in the bond market, which is seen as more rational and sober than the stock market. But at the heart is the risk the economy may be set to slow sharply from its current, extremely high growth.
Besides the new variants of the coronavirus, other risks to the economy include fading pandemic relief efforts from the U.S. government and a Federal Reserve that looks set to begin paring back its assistance for markets later this year.
Monday’s selling pressure was widespread, with nearly 90% of the stocks in the S&P 500 lower. Even Big Tech stocks fell, with Apple down 2.7% and Microsoft 1.3% lower. Such stocks seemed nearly immune to virus fears during earlier downturns, rising on expectations they’ll continue growing almost regardless of the economy’s strength.
Across the S&P 500, analysts are forecasting profit growth of nearly 70% for the second quarter from a year earlier. That would be the strongest growth since 2009, when the economy was climbing out of the Great Recession.
But just like worries are rising that the economy’s growth has already peaked, analysts are trying to predict how much corporate earnings growth will slow in upcoming quarters.