The cryptocurrency market is in turmoil, with the price of Ripple’s XRP token falling by more than 10% on Wednesday.
The markets drop is a result of the Covid-19 worries.
Stocks, bond rates, and oil prices all fell on Monday, the clearest indication yet that investors are doubting the global economic rebound that has propelled markets higher this year.
Investors’ expectations that economies would rebound helped markets rally in the first half of 2021, as governments rolled out Covid-19 vaccines and eased business restrictions. Reports on everything from retail sales to house prices to employment have indicated that large swathes of the US economy are improving, helping the S&P 500 to 39 new highs this year and almost double from its March 2020 low.
The retreat on Monday placed a crimp in that narrative. The Dow Jones Industrial Average dropped 725.81 points, or 2.1 percent, to 33962.04, the most since October. Meanwhile, the yield on the 10-year US Treasury note fell to its lowest level since February, as bond prices rose. In addition, crude oil prices in the United States fell 7.5 percent, reaching their lowest level since September.
Investors believe a growing list of worries about the recovery is behind the sell-off. The Delta coronavirus strain has spread quickly, reigniting discussion in many nations over whether lockdowns and activity restrictions should be reinstated. Meanwhile, inflation has risen faster than many expected, and deteriorating US-China ties have placed pressure on U.S.-listed Chinese businesses worth trillions of dollars.
Many investors think the global economy will continue to expand. They simply don’t sure how quickly—or whether the gains will be enough to prevent markets from becoming more expensive after a strong first half.
“The market is predicting a major slowdown in the economy in the next weeks or months,” according to Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management.
Is it possible that we’ve reached the pinnacle
Concerns that the best of the economic recovery may be behind us, according to investors, prompted market reversals on Monday.
According to the National Bureau of Economic Research, the United States’ 2020 recession lasted just two months, making it the shortest on record. In the year that followed, the economy grew at a faster pace.
In January through March, the US economy expanded at a seasonally adjusted annual rate of 6.4 percent, putting the country within 1% of its late-2019 high.
According to economists polled by the Journal, the economy grew at a seasonally adjusted annual rate of 9.1% in April-June, the second-fastest pace since 1983. Corporate profits are expected to rise as well. Profits for S&P 500 firms are expected to increase almost 70% year over year in the second quarter, the greatest pace in more than a decade, according to analysts.
Some investors are now wondering whether this is the best it can get.
Economists predict that the pace of U.S. growth this year peaked in the spring, and that it would decrease to 6.9% for the whole year of 2021 before dropping to 3.2 percent next year and 2.3 percent in 2023. These decreasing expectations have sparked significant price movements throughout the S&P 500, as well as the bond market.
“That’s what the market has been doing…starting to absorb peak growth rates and recognizing they’re unsustainable,” said John Porter, Mellon Investments Corp.’s chief investment officer of equities.
Growth elsewhere in the globe seems to be slowing as well, possibly posing new difficulties for investors. For the year, the S&P 500 has continued to beat the Stoxx Europe 600 and Shanghai Composite. Some investors, however, are concerned that the gap between US and international indices would shrink if the US economy slows further.
The price of oil is falling.
The oil market was one sector of the markets where concern of expansion rapidly surfaced.
Investors have been piling into optimistic wagers on oil for months, expecting that demand would surge and the economy would rebound quickly. In recent sessions, many of those wagers have been unwound. Fears that the Delta version would stop travel and stifle demand for fuel fueled Monday’s falls.
Shares of energy companies, which are susceptible to fluctuations in the economy, have also fallen. The energy sector of the S&P 500 has dropped 13% this month, making it the index’s worst performer.
Concerns that the best of the economic recovery may be behind us, according to investors, prompted market reversals on Monday.
Associated Press photo/Richard Drew
Sentiment Becomes Stalled
People all across the United States have been opening their wallets and spending on everything from automobiles to vacation for months. As Americans were immunized, companies reopened, and many people found themselves loaded with cash, thanks in part to stimulus cheques, investors became more bullish about the economy. According to a Gallup poll, the proportion of Americans who regard themselves to be “thriving” in life rose to 59.2 percent in June, the highest level in over 13 years.
Recently, there have been indications that this optimism is fading. Consumer spending increased in June, according to new statistics released last week. However, fresh data revealed that consumer confidence in the United States fell in early July, falling short of analysts’ forecasts surveyed by The Wall Street Journal. Meanwhile, the unemployment rate has remained unchanged, and some investors are worried that the economy is being slowed by a labor shortage.
Inflation is one of the most significant variables affecting mood. Consumer concerns about increasing housing, car, and household durable costs have reached new highs, disproportionately affecting lower and middle-income families. According to the Labor Department, the consumer price index increased 5.4 percent from a year earlier in June, the highest 12-month rate since August 2008.
Because consumer spending accounts for the majority of U.S. economic growth, investors pay attention to indications that consumers are becoming more cautious about large purchases. Inflation may cut into company earnings as well, making equities less appealing.
According to a recent Charles Schwab study, 15% of all stock market participants in the United States stated they started investing in 2020. Choosing a stock, on the other hand, may not be as simple as it seems. Aaron Back of the Wall Street Journal discusses the variables that go into stock selection. Rafael Garcia provided the artwork for this article.
“We saw strong inflation numbers last week. We are now concerned that the increase of Covid cases is causing the economy to deteriorate. In emailed remarks, Dave Donabedian, chief investment officer of CIBC Private Wealth Management, U.S., said, “High inflation with weaker economic growth is not a healthy mix.”
The Bond Market Issues a Caution
Even before Monday, bets for a slowing economy reverberated through the bond market. For weeks, investors have been eating up government bonds.
One consequence of the bond yields’ decline? The 10-year Treasury note’s actual yield has been negative, and on Monday it fell to 1.05 percent, its lowest level since February. After correcting for inflation, real yields are what investors receive on US government bonds. When bond rates are negative, as they have recently been, investors are essentially locking in losses by investing in government bonds.
“People are concerned about inflation, but they are equally concerned about growth,” said Giorgio Caputo, a portfolio manager at J O Hambro Capital Management. “There has never been a contemporary economy that has reopened after a pandemic.”
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According to him, investors have been flocking to government bonds as a result of these concerns, which has pushed real rates down and lower.
While a dimming growth forecast is bad news for equities as a whole, one segment of the market has benefitted from negative real rates. Lower yields reduce the discount rate in formulae used to forecast stock prices, increasing the value of future corporate profits. The recent decrease in rates has helped cause a massive change in the stock market in recent weeks by boosting shares of technology companies and other fast-growing businesses. Even while other sectors of the market have struggled, tech behemoths like Apple Inc., Amazon.com Inc., and Microsoft Corp. have soared to new highs.
On Monday, the Nasdaq Composite, which is heavily weighted in technology, beat its rivals. Many investors re-invested in the bets that had done well during the Covid-19 epidemic, when many individuals were stranded at home. Peloton Interactive Inc.’s stock increased by 7.1 percent, while Slack Technologies Inc.’s stock increased by 1%. The stock of Wayfair Inc. increased by 3.3 percent.
Shares in cyclical firms that benefit from a faster economic recovery, such as banks, energy companies, and airlines, on the other hand, were among the stock market’s poorest performances.
“It seems like the market has overextended the good times… Jason Pride, Glenmede’s chief investment officer of private wealth, said, “We’re seeing a little bit of the air being let out now.”
Investors are concerned about Covid-19.
More WSJ market stories, hand-picked by the editors
Gunjan Banerji and Akane Otani may be reached at [email protected] and [email protected], respectively.
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The wsj covid endemic is a worry that has been present for a while. It is a concern of the fact that Covid-19 has been present in so many products and it can cause serious problems to people who are using them.
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