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US Stocks Post Largest Drop Since May 09/20 16:10
Stocks on Wall Street closed sharply lower Monday, mirroring losses overseas
and handing the S&P 500 index its biggest drop in four months.
(AP) -- Stocks on Wall Street closed sharply lower Monday, mirroring losses
overseas and handing the S&P 500 index its biggest drop in four months.
Worries about heavily indebted Chinese real estate developers -- and the
damage they could do to investors worldwide if they default -- rippled across
markets. Investors are also concerned that the U.S. Federal Reserve could
signal this week that it's planning to pull back some of the support measures
it's been giving markets and the economy.
The S&P 500 fell 75.26 points, or 1.7%, to 4,357.73, its biggest drop since
May. At one point, the benchmark index was down 2.9%, the biggest decline since
last October. The S&P 500 was coming off two weeks of losses and is on track
for its first monthly decline since January. The S&P 500 has gone an unusually
long time without a pullback of 5% or more.
The Dow Jones Industrial Average fell 614.41 points, or 1.8%, to 33,970.47.
The blue-chip index was briefly down 971 points. The Nasdaq fell 330.06 points,
or 2.2%, to 14,713.90. The Hang Seng, Hong Kong's main index, dropped 3.3% for
its biggest loss since July. European markets fell about 2%.
"What's happened here is that the list of risks has finally become too big
to ignore," said Michael Arone, chief investment strategist at State Street
Global Advisors. "There's just a lot of uncertainty at a seasonally challenging
time for markets."
The worries over Chinese property developers and debt have recently centered
on Evergrande, one of China's biggest real estate developers, which looks like
it may be unable to repay its debts.
The fear is that a potential collapse there could send a chain reaction
through the Chinese property-development industry and spill over into the
broader financial system, similar to how the failure of Lehman Brothers
inflamed the 2008 financial crisis and Great Recession. Those property
companies have been big drivers of the Chinese economy, which is the world's
second-largest.
If they fail to make good on their debts, the heavy losses taken by
investors who hold their bonds would raise worries about their financial
strength. Those bondholders could also be forced to sell other, unrelated
investments to raise cash, which could hurt prices in seemingly unrelated
markets. It's a product of how tightly connected global markets have become,
and it's a concept the financial world calls "contagion."
Many analysts say they expect China's government to prevent such a scenario,
and that this does not look like a Lehman-type moment. Nevertheless, any hint
of uncertainty may be enough to upset Wall Street after the S&P 500 has glided
higher in almost uninterrupted fashion since October.
Besides Evergrande, several other worries have been lurking underneath the
stock market's mostly calm surface. In addition to the Fed possibly announcing
that it's letting off the accelerator on its support for the economy, Congress
may opt for a destructive game of chicken before allowing the U.S. Treasury to
borrow more money and the COVID-19 pandemic continues to weigh on the global
economy.
Regardless of what the biggest cause for Monday's market swoon was, some
analysts said such a decline was due. The S&P 500 hasn't had even a 5% drop
from a peak since October, and the nearly unstoppable rise has left stocks
looking more expensive and with less room for error.
All the concerns have pushed some on Wall Street to predict upcoming drops
for stocks. Morgan Stanley strategists said Monday that conditions may be
ripening to cause a fall of 20% or more for the S&P 500. They pointed to
weakening confidence among shoppers, the potential for higher taxes plus
inflation to eat into corporate profits and other signs that the economy's
growth may slow sharply.
Even if the economy can avoid that worse-than-expected slowdown, Morgan
Stanley's Michael Wilson said stocks could nevertheless drop about 10% as the
Fed pares back on its support for 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 expects a drop
of 10% to 15% for the S&P 500 in the final three months of the year. He cited
the Fed's tapering of its support, among other factors. So did Bank of America
strategist Savita Subramanian, as she set a target of 4,250 for the S&P 500 by
the end of the year. That would be a 4.1% drop from Friday's close.
Technology companies led the broader market lower. Apple fell 2.1% and
chipmaker Nvidia dropped 3.6%.
Banks posted big losses as bond yields slipped. That hurts their ability to
charge more lucrative interest rates on loans. The yield on the 10-year
Treasury fell to 1.31% from 1.37% late Friday. Bank of America fell 3.4%.
Oil prices fell 2.3% and weighed down energy stocks. Exxon Mobil fell 2.7%.
Smaller company stocks were among the biggest losers. The Russell 2000 fell
54.67 points, or 2.4%, to 2,182.20.
Airlines were among the few bright spots. American Airlines rose 3% to lead
all the gainers in the S&P 500. Delta Air Lines rose 1.7% and United Airlines
added 1.6%.
Cryptocurrency traders also had a rough day. The price of Bitcoin fell
nearly 8% to $43,717, according to Coindesk.
Investors will have a chance for a closer look at how the slowdown affected
a wide range of companies when the next round of corporate earnings begins in
October. Solid earnings have been a key driver for stocks, but supply chain
disruptions, higher costs and other factors could make it more of a struggle
for companies to meet high expectations.
"The market's biggest strength this year could become its biggest risk,"
Arone said.
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