Why has the stock market gone down today? Fears of Covid-19 were only one reason.

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Investors turned defensive on Monday, with stocks falling, bond prices rising and commodities trading as if there was another Covid-induced recession ahead.

Fears over the Delta variant of Covid-19 were the trigger for Monday’s sell-off, but they were also an opportunity for markets to let off steam after a long uncorrected rally. The declines could open buying opportunities for investors willing to allay such concerns and recover suddenly discounted names.

Stocks of more cyclical and economically exposed companies suffered the brunt of the declines on Monday. the

Dow Jones Industrial Average

closed down 726 points, or 2.1%, while the

S&P 500

lost 1.6% and heavy technology

Nasdaq Composite

fell 1.1%. The yield on the 10-year US Treasury bill fell below 1.2%, its lowest level since February. US oil prices fell 7.5%.

The Delta variant, a more contagious mutation of the coronavirus, has quickly become the dominant strain in the United States, accounting for the majority of infections in recent weeks. Centers for Disease Control and Prevention director Dr Rochelle Walensky said on Friday the spread was concentrated in areas where vaccination rates were relatively low. Walensky added that although new daily cases increased by 70% within a week, hospitalization and death rates were increasing less rapidly.

A new wave of Covid-19 infections raises the specter of a new wave of lockdowns and restrictions that would hamper the ongoing economic recovery. And with inflationary pressures firmly in place and commodity prices rising as supply chains struggle to meet demand, a horrible word comes to mind: stagflation, or spike in inflation despite growth. sluggish economy.

“The global economy is barely surviving 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 on Monday. of the Commonwealth Financial Network. “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. “

The grim news of Covid comes as market concerns have accumulated on several fronts. The fastest rate of inflation in years, uncertainty over an upcoming Federal Reserve policy change and high valuations had already put investors on alert. Expectations are also high for the current second quarter earnings season.

A lot of good news had already entered the market, with major indexes reaching new highs last week. The S&P 500 was up 16% this year and has not fallen more than 5% since last fall, an environment conducive to a correction in equity prices.

But that doesn’t mean everything is pessimistic for equity investors here. Periodic corrections can be healthy for a bull market as they push valuations back, providing buying opportunities for newly discounted stocks.

“The [S&P 500] is under 20 days [moving average] this morning for the first time since mid-June, when a four-day pullback set in, ”Katie Stockton, Founder and Managing Partner of Fairlead Strategies, focused on technical analysis, wrote on Monday. “Short-term momentum is now on the decline, but we believe the pullback will be short-lived as well.”

Additionally, Stockton noted that the S&P 500 found support around its 50-day moving average of 4232 on Monday. The index closed at 4,258.49 on Monday.

Concerns about new Covid-related lockdowns on the horizon could be overblown at this point in the pandemic. It is safe to say that there is little appetite for continued or reimposed restrictions in Americans, and the Delta variant has not been shown to cause serious infections in vaccinated individuals, keeping mortality at a low rate. Low level.

“We expect reflation trading – cyclical stocks, bond yields, high beta stocks, reflation and reopening themes – to rebound imminently as fears of the Delta variant abate and inflation surprises. persist, and because of the supports of above-trend growth, strong consumer fundamentals and a low minimum rate of return, ”wrote

JP Morgan‘s

On Monday, the chief strategist of world markets, Marko Kolanovic.

In other words, buy the dip. A 2020-style Covid lockdown in the United States shouldn’t be high on the list for investors who already have enough reason to worry.

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