Virus Headwinds Hit Wall St. After Months of Smooth Sailing
The S&P 500 fell as much as 2 percent, a reflection of concerns about economic growth and new restrictions on travel and tourism.,
Virus Headwinds Hit Wall St. After Months of Smooth Sailing
- July 19, 2021, 9:19 a.m. ET
Fear jolted the financial markets on Monday as investors realized that the path to global economic recovery after the pandemic would be anything but straightforward.
For months, investors had been behaving as if they expected a full, smooth rebound from the Covid crisis. From January through June, stocks rose 14 percent, one of the best first-half performances since the late 1990s.
But the virus’s potential to upend life all over again caught up with investors, as a spate of worrying news — in particular, new outbreaks involving the highly contagious Delta variant among unvaccinated people — led to a big sell-off on Monday. The S&P 500 stock-market index had its worst decline since May, sliding more than 2 percent during the day before closing down 1.6 percent. The Dow fell 2.1 percent, its biggest one-day loss this year. Europe’s Stoxx 600 fell 2.3 percent.
“The impact of Covid on the stock market isn’t over yet,” said Lori Calvasina, head of U.S. equity strategy with RBC Capital Markets in New York. “We’re not saying it’s going to derail the recovery. We don’t think that, but we do think it could cause some additional bumps.”
Investors were forced to reckon with troubling signs from around the globe.
New cases in the United States have more than doubled over the last 14 days to an average of 31,745 a day, driven mainly by infections among the unvaccinated. With just 49 percent of the country fully vaccinated, the Biden administration is scrambling to persuade more people to seek out shots so that the U.S. can achieve herd immunity.
Infections are also soaring in England, which lifted its final Covid-related restrictions on Monday. Indonesia, the world’s fourth-most-populous country, has replaced India as the epicenter of global infections and is considering extending restrictions already in place. Vietnam, Malaysia, Myanmar and Thailand have imposed new restrictions in the face of large outbreaks, potentially slowing any return to normalcy in Southeast Asia. And in Tokyo, where the Olympic Games are scheduled to begin on Friday, a coronavirus cluster threatens to overshadow the pageantry.
The nature of the recovery — one step forward, two steps back — is wearing investors down, analysts said. So is the growing realization that unstinting support from the Federal Reserve, big government stimulus and the availability of vaccines aren’t enough to make Covid a thing of the past.
“The sounds from investors, the tone, is just like, ‘All right, that’s behind us. What’s next? Let’s move on,'” said Michael Kantrowitz, chief investment strategist with Cornerstone Macro, a Wall Street research firm. “And the reality is that it’s kind of creeping back into the back door.”
On Monday, investors behaved as they had during the pandemic’s early days, pouring money into so-called stay-at-home stocks, whose business models appear almost tailor-made to thrive despite lockdowns. Shares of Peloton climbed more than 7 percent. Stock in Etsy, which soared last year as consumers sought out homemade masks, jumped 3.2 percent.
Investors also bought shares of Clorox, the grocery chain Kroger, Campbell Soup and the toilet tissue maker Kimberly-Clark. Such consumer staples companies fared extraordinarily well during the worst period of last year’s pandemic panic, as consumers stockpiled essentials.
The pain was especially pronounced in areas such as airlines, pleasure cruise companies and casual restaurant chains — all of which had begun to recover this year as the pandemic first came under control. Norwegian Cruise Line and United Airlines each fell about 5.4 percent. Shares in the office building owner Vornado dropped nearly 4.7 percent, as investors priced in the chance that a return to normal working patterns after the summer could be under threat.
One reassuring data point came on Monday from the National Bureau of Economic Research’s Business Cycle Dating Committee — which formally declares when recessions begin and end. The economic downturn induced by the pandemic was the shortest on record, lasting just two months and ending in April 2020, but that fact wasn’t enough to assuage anxious investors.
They poured their money into government bonds in a rush to safety, pushing bond yields — which move in the opposite direction of prices — sharply lower. The yield on the 10-year note dove to 1.19 percent.
Economically sensitive stocks such as commodities producers, financials and industrial firms led the market lower. Technology stocks also slumped, with the tech-heavy Nasdaq composite index dropping 1.1 percent. The Vix, an index widely known as Wall Street’s fear gauge, soared more than 20 percent, its biggest leap since May.
Just a few weeks ago, the main worry for investors was inflation — the possibility that an economy growing so rapidly would set off a bout of runaway price increases. In particular, investors were concerned that soaring prices would cause the Fed to back away from some of the easy money policies the central bank put in place during the pandemic, which have helped supercharge markets over the last year.
But the sell-off across the market on Monday underscored the fact the real economic and financial threat is far likelier to be a slowdown in growth because of recurring outbreaks of Covid-19.
“The rise of Covid fears kind of creates the antithesis for the inflation story,” Mr. Kantrowitz said of the market’s slide on Monday.
The weakness wasn’t solely attributable to concerns over the virus. A sharp sell-off in crude oil clobbered shares of energy companies. The drop began after the powerful oil cartel OPEC and Russia agreed to lift production this weekend.
Exxon shares fell 3.4 percent and Chevron was off 2.7 percent. Stocks dropped for smaller oil and gas companies such as Marathon Oil (off 5.4 percent) and Diamondback Energy (down 6.6 percent), which until recently were some of the best-performing stocks in the S&P 500 this year.
Stock market investors also appeared to be increasingly unnerved by a sharp decline in yields on government bonds, widely viewed as a one of the best barometers of market expectations about economic growth and inflation. The yields have been slipping for weeks, and Wall Street was caught off guard by the recent drop.
The sharp tumble of the yield on the 10-year Treasury note on Monday pushed yields back to where they were in February, when the outlook for the American economy was far less certain, and vaccinations were only beginning to get underway in earnest. That suggests investors now have a far hazier view of the economic outlook than they did a just few weeks ago.
“You’ve had this sharp drop in bond yields, which the investment community is struggling to explain,” said Ms. Calvasina of RBC Capital. “The equity world is confused by it, and concerned about it.”
Coral Murphy Marcos contributed reporting.