Wall Street tumbled to its lowest level in more than a year on Monday as renewed concerns about China’s economy piled up in markets already hit by rising interest rates.
The S&P 500 was down 2.3% in afternoon trading, its longest streak in more than a decade, after coming out of its fifth straight losing week. It joined the markets in one worldwide swoop. Not only did stocks fall across Europe and much of Asia, but so did everything from old economy crude to new economy bitcoin.
The Dow Jones Industrial Average was down 374 points, or 1.1%, at 32,520 as of 3:16 a.m. Eastern Time, and the Nasdaq Composite was down 3.4% as tech-oriented stocks again took the brunt of the sell-off. Monday’s sharp drop leaves the S&P 500, Wall Street’s main measure of health, down nearly 16% from its record set earlier this year.
Much of this year’s losses are the result of the Federal Reserve’s aggressive flip to do everything it can to prop up financial markets and the economy. The central bank has already pulled its key short-term interest rate from its record low of zero, where it sat for almost all of the pandemic. Last week, it indicated there could be an additional double the normal amount in the coming months, with the economy widely expected to stamp out higher inflation.
The move by design would slow the economy by making it more expensive to borrow. The risk is that the Fed could cause a recession if it moves too far or too quickly. Meanwhile, higher rates discourage investors from paying very high prices for investments, as investors can instead get more than they did before by owning super-secure Treasury bonds.
For example, bitcoin is down about 29% since the beginning of April. According to Coindesk, it dropped 10.8% on Monday. Concerns about the world’s second largest economy added to the despair on Monday. Analysts cited comments by a Chinese official warning of dire conditions for jobs over the weekend, as the country hopes to contain the spread of COVID-19.
Authorities in Shanghai have tightened restrictions again, amid complaints from citizens that it seems endless, as the city was emerging from a month of strict lockdown following an outbreak.
The fear is that China’s strict anti-COVID policies will add further disruption to trade and supply chains around the world, while dragging down its economy, which for years was a main driver of global growth.
In the past, Wall Street has been able to hold steady despite similar pressures because of the strong profit growth companies were producing.
But the enthusiasm for large US companies this recent earnings reporting season has been low. As a whole, companies are reporting higher-than-expected profits for the latest quarter, as it usually is. But discouraging signs for future growth are plentiful.
Strategist Savita Subramanian wrote in a BofA Global Research report that the number of companies hit the highest level since the second quarter of 2020, citing “weak demand” in her conference call after the earnings report. Tech’s earnings are also lagging, she said.
The technical sector is the largest in the S&P 500 by market value, which gives it additional weighting to market movements. Many tech-oriented companies saw a jump in profits through the pandemic as people looked for new ways to work and entertain themselves while locked down at home. But the slowdown in their profit growth has left their stocks vulnerable, as their prices have risen so high on hopes of continued profit.
High interest rates engineered by the Fed are also making their stock prices particularly difficult because they are seen as some of the most expensive on the market. The Nasdaq Composite’s loss of about 25% so far for 2022 is much sharper than other indices.
Electric automaker Rivian Automotive slid 19.1% on Monday as restrictions ended, which prevented some big investors from selling their shares since its stock market debut six months ago. It has lost more than three quarters of its value so far this year.
The yield on the 10-year Treasury has risen to its highest level since 2018 as inflation and expectations of Fed action rise. It softened on Monday, falling from 3.12% late Friday to 3.07%. But it is still more than double the level of 1.51% where it started the year.
In Asian stock markets, Japan’s Nikkei 225 fell 2.5% and South Korea’s Kospi fell 1.3%. Shanghai shares rose 0.1%.
In Europe, France’s CAC 40 fell 2.8%, and Germany’s DAX fell 2.1%. London’s FTSE 100 fell 2.3%.
Aside from concerns about inflation and coronavirus sanctions, the war in Ukraine is still a major cause of uncertainty. Ukrainian officials say more than 60 people are feared dead in a Russian bombing at a school being used as a shelter. Moscow’s army launched its attack on defenders inside Mariupol’s steel plant in an apparent race to capture the city ahead of Russia’s Victory Day holiday on Monday.
Even the energy sector, which has been performing well in recent weeks, was under pressure on Monday. Benchmark US crude fell 6.1% to $103.09 a barrel, though it is still up around 40% this year. Internationally, Brent crude fell 5.7% to $105.94 a barrel.