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The stock market suffered its biggest one-day decline since October on Monday, as investors appeared to be taking cues from the bond market and starting to worry about growth.
The question for traders is whether this is scary enough to trigger what many see as a long overdue sell-off, or simply offers another buying opportunity for the bulls.
The fixed income market has “signaled growth problems in recent months,” Marvin Loh, senior global markets strategist at State Street, said in a telephone interview.
The culprit that was blamed the most on Monday was the delta variant of the coronavirus which causes COVID-19, and which is responsible for the growth of infections around the world, including the United States and other countries that have deployed vaccines. Fears of further travel restrictions and the further spread of the highly transmissible variant, especially among the unvaccinated, put pressure on travel-related stocks and other industries and sectors that had previously benefited from betting on cyclical companies that stand to benefit the most from economic conditions. reopening.
In the end, the Dow Jones Industrial Average DJIA,
fell 725.81 points, or 2.1%, to close at 33,962.04, its largest single-day percentage and point decline since October 28. The S&P 500 SPX,
lost 68.67 points, or 1.6%, to end at 4,258.49, while the Nasdaq Composite COMP,
lost 152.25 points, or 1.1%, ending at 14,274.98 – the worst day for both indices since May 12. Meanwhile, the Russell 2000 RUT Small Cap Index,
fell 1.5% to 2,130.68, avoiding a close in correction territory at or below 2,124.15, representing a decline of at least 10% from a recent high.
Spread the blame
But the Delta variant wasn’t the only one to blame. Loh noted that Washington’s prospects for further fiscal stimulus have been stalled for some time. A pre-reopening boost to trade came after Georgia’s January run-off Senate elections, which gave Democrats very thin upper house control and paved the way for aggressive tax measures. pushed by President Joe Biden.
Investors also cited tensions between the United States and China, after the Biden administration accused Beijing of a hack into Microsoft Exchange mail server software that compromised tens of thousands of computers around the world. early this year. The European Union and Britain have also singled out China.
But after a first victory on a major spending plan, efforts to push for a big infrastructure spending bill and additional policy plans stalled, leaving only monetary policy the focus.
And while the Federal Reserve is not rushing to cut bond purchases or raise interest rates, a pullback in monetary stimulus is in sight. And other major central banks, including the European Central Bank and the Bank of Canada, are also considering scaling back stimulus efforts, Loh said.
The Delta variant, meanwhile, “makes things a lot more uncertain as to how things will go down,” Loh said, noting that “peak growth is something that is being talked about a lot more.”
Meanwhile, yields on long-term US Treasuries and other developed market bonds have fallen. Indeed, the fall in the 10-year rate TMUBMUSD10Y,
which had risen to nearly 1.8% in March as growth expectations rose and inflation fears mounted, then collapsed. On Monday, it was trading below 1.20% for the first time since mid-February. The yields and prices of debt move in opposite directions.
Redux stagflation?
For some investors, lower yields reflect easing inflation fears, with investors demanding less premium to protect future coupon payments from erosion by inflation. But others argued that falling yields and falling stock markets on Monday indicated growing fears of stagflation, a term often associated with the 1970s mix of inflation and unemployment.
See: Why a bond rally could push the 10-year Treasury yield further, even as inflation expectations are no longer anchored
“The global economy barely survives on life support, and another wave of infections could trigger lockdowns that could spell the end of a tenuous recovery,” said Peter Essele, head of investment management for Commonwealth Financial Network, in emailed remarks.
“The fear of stagflation will be a major concern for investors if a resurgence in COVID infections causes economies to slow down as consumer prices continue on their upward trajectory,” he said. “The strong performance of inflation-linked bonds lately may be an indication that these fears are setting in, as the bus has already left the station.”
Keep in perspective
But others felt Monday’s massive sell-off was long overdue, as major indices continued to hit all-time highs as late as last week.
Indeed, the fact that Monday’s declines were the largest in months may further attest to the lack of market volatility that accompanied the stock market recovery. The S&P 500 has not fallen at least 5% from a recent high since late October, according to Dow Jones Market Data.
This is one of the longest periods without such a decline in the past decade, analysts at Truist Advisory Services wrote in a note. “Historically, we tend to see two or three declines of more than 5% per year, all of which come with negative headlines,” they noted.
Indeed, a pickup in volatility has accompanied growing concerns about COVID and new variants have triggered a pickup in volatility, with the Cboe Volatility Index VIX,
jumping in recent sessions to trade above 22 in Monday night’s action, having traded near 14 about two weeks ago, below its long-term average near 20.
This helped fuel the weakness in equities, said Mike Lewis, head of US equity spot trading at Barclays, in comments sent via email.
The jump in volatility causes’ systematic ‘traders, especially trend-following commodities trading advisers, to’ take profits on recent stock gains, thus creating a large supply in a stock market with low volumes. summer and a context of mediocre liquidity ”.
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