After a dizzying rally this year, stock markets were hit hard on Monday as a spike in COVID-19 infections around the world reinforced the reality of living with a pandemic that refuses to go away.
The Dow Jones Industrial Average, tumbled 725 points, or 2.1%, and had its worst day since October, while the S&P500 fell 1.6%.
The losses mark a rare day of declines for a market that was at record highs as early as last week.
Here are three key things to know about the market’s fall.
What led to the sharp falls?
In a word, COVID-19. Though the rollout of vaccines has allowed some semblance of normality to return in the U.S., countries such as Indonesia continue to see surging infections, especially from those tied to the most recent Delta variant.
The continued rise in cases is starting to spook investors as the world continues to deal with the economic and health fallout from the pandemic.
Among the leading decliners on Monday were travel and leisure stocks like United Airlines, which fell 5.5% and cruise operator Carnival, which slumped 5.7%.
The pandemic worries come at a time when investors were already concerned about inflation. Data last week showed consumer prices surging 5.4% in June from a year earlier, the biggest hikes in nearly 13 years.
Although the Federal Reserve has insisted inflation is transitory, not all investors all convinced. Higher-than-expected inflation could force the Fed to apply the brakes to the economy earlier, including by raising interest rates earlier than in 2023, when it’s currently expected to do so.
How worrisome are the falls?
It’s hard to say with one day of falls alone. These types of declines are not uncommon, but they felt more jarring because markets so far have been on a dizzying run: As of Friday, the Dow was up 13.3% for the year while the S&P 500 was up 15.2% for the year, with both hitting a series of ever-climbing record highs.
In fact, experts have been warning markets for a while that markets were due for a pullback, and chances are sentiment could remain volatile for a while.
Savita Subramanian, the head of U.S. equity strategy and quantitative strategy at Bank of America Securities, says it is important to remember some market volatility is normal and called Monday’s falls “not something to write home about.”
“It’s actually kind of a normal market environment,” she says.
For the most part, analysts still expect gains in markets to continue but the pace might slow down if inflation and COVID-19 worries continue to take hold.
Valuations are high and investors will likely want to see more confidence that recent gains are justified.
So where do markets head to from here?
A lot will depend on the trajectory of the economy and the pandemic.
The economy is coming off a blockbuster first half of the year. That’s likely to be reflected in the economic growth data for the April-June quarter due out next week, which is likely to show a blistering pace of expansion.
That pace of gains is likely to be unsustainable especially as most of the impact from the government stimulus measures fade.
Bond investors in fact have been betting for weeks now that they expect a slower economy in the second half, and those bets are starting now to be reflected in stocks as well.
A slower – but still solid – economy is not a bad thing for markets. But a lot can still go wrong.
COVID-19 infections could continue to spike. Key sectors of the economy also continues to be hobbled by supply chain disruptions and labor shortages. And inflation could prove harder to reverse.
“I think common sense will tell you that there are going to be issues coming along,” says Michael Purves, CEO of investment firm Tallbacken Capital. “And a lot of that will probably weigh on some part of the recovery story.”
Published at Mon, 19 Jul 2021 22:44:30 +0000
This post originally posted here https://www.npr.org/2021/07/19/1017949934/stocks-took-a-hard-hit-here-are-3-key-questions