Why has the stock market dropped?
The major U.S. stock indexes fell Thursday on concerns about the global economic comeback from Covid-19. The losses came as Japan declared a state of emergency in Tokyo for the upcoming Olympics and as countries deal with a rebound in cases due to Covid variants. CNBCDow drops more than 250 points amid global economic recovery concerns, S&P 500 slides
09 July, 2021 - 09:10am
09 July, 2021 - 09:10am
U.S. stocks closed lower on Thursday, as falling bond yields reflected investor concern that a resurgence of COVID cases in some countries may slow the global economic recovery.
On Wednesday, stocks edged higher, with the S&P 500 rising 0.3% and the Nasdaq Composite eking out a gain of just over 1 point — enough to lift both indexes to record finishes. The Dow rose 104.42 points, or 0.3%, to end at 34,681.79.
U.S. stock benchmarks retreated, with the weaker tone across global equities attributed, at least in part, to worries that the recovery could be slowed by persistent supply bottlenecks and the spread of the delta variant of the coronavirus that causes COVID-19.
The price action across markets reflected a “tug of war between fears of inflation and fears of growth peaking,” said Art Hogan, chief market strategist at B. Riley-National, in a phone interview. At present, fears of an inflation surge “are being replaced with the fear that this is as good as it’s going to get” for economic growth, he said.
In the end, such fears are likely to prove unfounded as bottlenecks resolve themselves and as corporate earnings reports begin to roll in next week, Hogan said.
Earlier Thursday, the U.S. Labor Department said initial jobless claims rose to 373,000 from an upwardly revised 371,000 in the seven days ended July 3. Economists had looked for claims to drop to 350,000.
A sharp drop in bond yields the yield on was attributed in part to concerns about a slowing pace of economic recovery and fading fears of persistent inflation. The 10-year U.S. Treasury yield BX:TMUBMUSD10Y was down 3.4 basis points at 1.287% after dipping below 1.25%, its lowest since February. The fall in long-dated yields has significantly flattened the yield curve, a plot of yields across Treasury maturities.
The curve flattening “has already led market participants to sell cyclical stocks in favor of large-cap growth stocks, essentially reversing the rotation into value stocks experienced since September,” said Steven Ricchiuto, chief U.S. economist at Mizuho Securities, in a note.
Analysts have scrambled to explain the Treasury rally, which has seen the 10-year yield tumble from above 1.40% at the beginning of the month, with explanations ranging from a loss of faith in the economic recovery, to global appetite for yield, to technical factors that have seen a flush out of speculative bets on rising yields.
Technology shares, however, did not benefit on Thursday as yields fell, as they often do, which may have been a reflection of the idea that the sector’s valuations had become overstretched in recent sessions, leaving them vulnerable to profit-taking amid a broad market selloff, Hogan said.
Analysts said concerns over the delta variant of the coronavirus weighed on sentiment. Japan on Thursday placed Tokyo under a state of emergency that may continue through the Olympic Games.
But others struck a more sanguine note that mirrored the midday uptick.
“Although the cyclical rotation has paused for now, we believe that there is still room for it as there is more reopening to happen,” Esty Dwek, head of global market strategy at Natixis Investment Managers Solutions wrote in a note.
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08 July, 2021 - 05:06pm
The major averages rose on Friday, rebounding from the previous session's losses amid concerns of a slowdown in global economic growth.
The Dow Jones Industrial Average rose about 365 points, or 1%. The S&P 500 bounced by 0.8% and the technology-heavy Nasdaq Composite rose 0.6%. The gains brought all three majors averages into the green for the week.
The stocks that led the losses on Thursday, reopening plays and banks, led the gains on Friday. Bank of America jumped 2.5%, leading a bounce in financial shares. Royal Caribbean and Wynn Resorts each popped 2%. American Airlines and United Airlines gained about 2%.
Shares of GM gained 3.5% after Wedbush said the stock is a buy and could jump more than 50% as investors realize the extent of its tech and electric vehicle evolution.
Big Tech stocks were weaker on Friday as President Biden was set to sign a new executive order aimed at the competitive practices by the sector's giants. Amazon was down about 0.7% after hitting a new all-time high on Thursday.
The yield on the 10-year Treasury rebounded 5 basis points to 1.34%, easing concerns about an economic slowdown (1 basis point is 0.01%). Falling yields have mystified investors lately, with the 10-year yield falling to 1.25% at its low on Thursday.
Thursday's losses came as the proliferation of the highly infectious delta Covid variant also fueled worries about the global economic comeback. The Olympics announced a ban of spectators at Tokyo's summer games as Japan declared a state of emergency to curb the spread of coronavirus. Plus, the latest jobless claims report released Thursday also indicated a potential slowdown in the labor sector.
"Our central case has been for a choppy July" with the S&P 500 falling as low as 4,100, wrote Tom Lee, Fundstrat's head of research, in a note to clients Thursday night. "While this is a possibility, we think there is a chance [Thursday] marked the peak of [the] 'growth scare' and if this is correct, equities might be shifting towards a broader risk on."
The Dow closed Thursday's regular session lower by nearly 260 points. The S&P 500 dipped 0.86%, while the Nasdaq broke a four-day win streak by falling 0.72%.
"The market is solidly mid-cycle and with that typically comes a 10-15% index level correction. We expect such a correction will create buying opportunities given a still strong growth backdrop," Mike Wilson, Morgan Stanley's chief U.S. equity strategist, told clients. Wilson favors financials, healthcare and materials.
"Our economic growth forecasts remain positive, but bigger bulls continue to talk about 'pent up demand'," Wilson added. "We agree there is pent up demand for services consumption. We also think the degree of overconsumption in goods and the ensuing payback is under-appreciated as the positive effects on income from stimulus checks and the surge in asset prices fade."
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