U.S. stocks fall to start year of great expectations
U.S. stocks closed lower Monday as big swings return to Wall Street to start a year when the dominant expectation is for a powerful economic rebound to sweep the world.
The S&P 500 was 1.5% lower at the close. The Dow Jones Industrial Average also fell from its record set last week.
Coronav ir us c a ses 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 runoff elections in Georgia 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.”
Elsewhere in the world, stocks 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 most European and Asian stock indexes higher. Treasury yields were holding relatively steady after giving up a healthy gain in the morning.
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.
The hope in markets had been that vaccines will allow daily life around the world to slowly return to normal. That’s helped spark a recent recovery for stocks of travel-related 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.
Governments might 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.
“I nve s t or s 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 regulations and other changes from Washington that would hinder corporate profits. Democrats already control the House, and Presidentelect 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.