People walk past a bank’s electronic board showing the Hong Kong stock index at the Hong Kong Stock Exchange in Hong Kong on Monday.
Stocks tumbled on Wall Street on Monday, reflecting losses overseas and keeping the S&P 500 index on track for its biggest drop since February.
Concerns about debt-ridden Chinese property developers – and if they could harm investors around the world if they default – are rippling across markets. Investors are also concerned that the US Federal Reserve may signal this week that it plans to roll back some of the support measures it has been giving to markets and the economy.
As of 1:21 p.m., the S&P 500 is down 2.2%. The benchmark index is also coming out of a two-week loss and is on track for its first monthly decline since January.
The Dow Jones Industrial Average fell 799 points, or 2.3%, to 33,783, and the Nasdaq fell 2.7%. The shares of the smaller company were the biggest losers. The Russell 2000 fell 3.2%.
Technology companies led the broader market. Apple fell 2.7% and chipmaker Nvidia fell 4.6%.
Banks suffered huge losses due to lower bond yields. This hurts their ability to charge more attractive interest rates on loans. The yield on the 10-year Treasury fell to 1.32% from 1.37% late Friday. Bank of America dropped 3.1%.
Oil prices fell 2% and energy stocks were weighed down. Utilities and other sectors that are considered less risky are better placed than the rest of the market.
There were some bright spots. Pfizer announced that its vaccine works for children between the ages of 5 and 11, amid widespread market decline, and will soon seek US authorization for that age group.
Concerns over Chinese property developers and debt have recently focused on Evergrande, one of China’s biggest real estate developers, which looks like it may be unable to repay its debt.
Many analysts say they expect China’s government to prevent an explosion severe enough to cascade through the market. But any sign of uncertainty could be enough to upset Wall Street, as the S&P 500 has soared higher in a nearly uninterrupted fashion since October. It set its most recent closing high two weeks ago, on September 2.
Hong Kong’s main index, the Hang Seng, dropped 3.3% for its biggest loss since July. Many other markets in Asia remained closed for the holidays. European markets fell about 2%.
“What happened here is that the list of risks eventually grew too large to ignore,” said Michael Aron, chief investment strategist at State Street Global Advisors. “There is a lot of uncertainty in seasonally challenging times for markets.”
Besides Evergrande, there are many other concerns lurking beneath the mostly calm surface of the stock market. In addition to the Fed possibly announcing that it is abandoning the accelerator on its support for the economy, Congress could opt for a disastrous game of chicken before allowing the US Treasury to borrow more money and fight the COVID-19 pandemic. The economy continues to weigh heavily
Regardless of what was the biggest reason for Monday’s market volatility, some analysts say such a fall was the reason behind it. The S&P 500 hasn’t even fallen 5% from its peak since October, and the nearly unstoppable rise has left stocks more expensive and with less room for error.
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All the worries have pushed some on Wall Street to predict an upcoming decline for the stock. Strategists at Morgan Stanley said Monday that conditions could be ripe for the S&P 500 to drop 20% or more. He pointed to weak confidence among shoppers, the possibility of higher taxes and inflation eating into corporate profits, and other signs that the economy’s growth may be slowing sharply.
Even if the economy may survive that worse-than-expected recession, Morgan Stanley’s Michael Wilson said the stock could still fall about 10% as the Fed backs down on its support for the markets. The Fed is due to deliver its latest economic and interest rate policy update on Wednesday.
Earlier this month, Stifel strategist Barry Bannister said he expected a 10% to 15% drop for the S&P 500 in the final three months of the year. He cited the Fed’s lack of support for it, among other factors. Bank of America strategist Savita Subramaniam also set a target of 4,250 for the S&P 500 by the end of the year. It will be down 4.1% from Friday’s close.
Investors will have a chance to see how the slowdown affected a wide range of companies when the next round of corporate earnings starts in October. Solid earnings have been a major driver for stocks, but supply chain disruptions, higher costs and other factors could make it more of a struggle for companies to meet higher expectations.
“The market’s biggest force this year could turn out to be its biggest risk,” Aaron said.
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