Concerns over the resurgent pandemic are easing Wall Street shares in Sydney on Monday, fueled by fears that more rapidly spreading virus variants could boost the economy’s strong recovery.
The S&P 500 was 2 percent lower in afternoon trading, having set a record just a week earlier. In another sign of concern, the ten-year Treasury yield hit its lowest level in five months as investors sought safer places to put their money.
The Dow Jones industrial average fell 885 points, or 2.6 percent, to 33,802 at 12:58 p.m. The Nasdaq compound was 1.5% lower.
Airlines and the shares of other companies that would be most affected by the possible restrictions of COVID-19 suffered some of the heaviest losses, similar to the first days of the pandemic in February and March 2020. The owner of the Simon Property Group mall fell 5.9 percent, and cruise operator Carnival lost 5.5 percent.
The fall also went around the world, with several European markets collapsing by about 2.5% and Asian indices slightly less. Meanwhile, the U.S. crude oil price fell more than 6% after OPEC and allied countries agreed on Sunday that higher oil production would finally be achieved this year.
Thanks to COVID-19 vaccines, growing concerns about the virus may seem strange to people in parts of the world where masks come out or already have them. But the World Health Organization says cases and deaths are rising worldwide after a period of decline, spurred on by the highly contagious variant of Delta. And given the close connection of the world economy, success anywhere can quickly affect other people on the other side of the world.
Experts say Indonesia has become a new epicenter of the pandemic as outbreaks worsen in Southeast Asia. Meanwhile, some athletes have tested positive for COVID at the Tokyo Olympic Village, with the Games being held on Friday.
Even in the United States, where the vaccination rate is generally higher, people in Los Angeles County must wear masks inside again, regardless of whether they are vaccinated after spikes in cases, hospitalizations, and deaths.
Across the country, the daily number of COVIDs has skyrocketed to about 20,000 in the last two weeks to about 32,000. The vaccine campaign has hit the wall, with an average number of daily inoculations falling to the lowest levels since January. Cases increase in all 50 states.
Localized coronavirus outbreaks are beginning to affect heavily unvaccinated communities in places like Missouri and Arkansas, where hospitals run out of space again. Almost all hospitalized COVID patients are not vaccinated. More than 68 percent of the U.S. adult population has received at least one dose of vaccine and 59 percent are fully vaccinated. And about a dozen states have not yet vaccinated 40% of their population.
Financial markets have been showing signs of growing concern for some time, but the U.S. stock market has remained largely resilient. The S&P 500 has had just two weeks off in the last eight, and the last time it even had a 5 percent drop from the record high was in October.
Several analysts pointed to this backdrop of high prices and very quiet moves for weeks as they dissected Monday’s fall.
“It’s a bit of an overreaction, but when you have a record-breaking market, it’s had the kind of journey we’ve had, with virtually no setbacks, it becomes extremely vulnerable to any kind of bad news,” said Vice President Randy Frederick of trading and derivatives of Charles Schwab. “It was just a matter of what that turning point was, and it looks like we finally got there this morning” with concerns about the delta variant.
He and other analysts are optimistic, stocks may rebound quickly. Recently, investors have been trained to see every drop in stocks as a simple opportunity to buy lows. In addition, the general expectation remains that the economy will continue to grow.
Barry Bannister, Stifel’s chief stock strategist, was more pessimistic. He says the stock market could be in the early stages of a 10 percent drop after its sharp rise in prices. The S&P 500 nearly doubled after hitting its peak in March 2020.
“The ratings, they’ve gotten too frothy,” he said. “There was so much optimism.”
The bond market has been stronger and more persistent in its warnings. Ten-year Treasury yields tend to move with expectations of economic growth and inflation, and have been sinking since late March, when it stood at around 1.75 per cent. It fell to 1.19 percent on Monday, from 1.29 percent Friday late.
Professional analysts and investors say a long list of reasons is potentially behind strong bond market movements, which are considered more rational and sober than the stock market. But deep down, there is a risk that the economy could slow sharply relative to its current, extremely high growth.
In addition to new variants of the coronavirus, other risks to the economy include declining pandemic mitigation efforts by the U.S. government and a Federal Reserve that looks set to begin recovering its aid to markets in later this year.
Monday’s selling pressure was widespread, with 95% of the S&P 500 shares lower. Even Big Tech shares fell, with Apple down 2.9% and Microsoft down 1.6%. These actions seemed almost immune to fears of viruses during previous recessions, raising expectations that they will continue to grow almost regardless of the strength of the economy.
The losses occurred despite several companies reporting even stronger profit growth from April to June than analysts expected. Tractor Supply said both its profits and revenue exceeded Wall Street expectations, for example, but its shares fell 4.5 percent.
Across the S&P 500, analysts forecast earnings growth of nearly 70 percent for the second quarter of a year earlier. This would be the strongest growth since 2009, when the economy emerged from the Great Recession.
But just as concerns are growing that economic growth has already peaked, analysts are trying to slow down the amount of growth rates that will slow in the coming quarters and years to make corporate profits.