Sign up to myFT Daily Digest to be the first to know about stock news.
Investors in the $51 trillion US stock market conclude that the spread of the Delta coronavirus variant will dampen the global economic recovery and threaten a record-breaking rally.
The benchmark S&P 500 index fell the most in a month on Wednesday before posting a small gain on Thursday. Major stock indices in Europe and Asia closed lower on Thursday.
In recent weeks, signs of a weakening recovery have piled up as the coronavirus spread again, with surveys pointing to weaker business growth in several regions of the US and deteriorating consumer confidence trends. Data on Tuesday added to the concerns investors faced as retail sales in the country fell faster than expected. Weak economic data from China has only added to the concerns.
Coupled with signals that Federal Reserve policymakers are gearing up to scale back emergency stimulus in the coming months, money managers expressed doubts about stocks’ ability to rise above already high levels.
Trading in options markets underscored investors’ cautious stance as many traders on Thursday focused on derivatives that would protect against stock declines. And data from the Investment Company Institute showed that investors added money to government money market accounts for the second week in a row when they switched to cash.
“The market is at record highs,” said Jim Tierney, portfolio manager at AllianceBernstein. “Look where we’ve come in a year’s time . . . Look at the high P/E ratios. When you add all that up, people are just nervous and they’re like, ‘Let me take some money off the table.’”
The spate of coronavirus cases linked to the more contagious Delta strain prompted economists at Goldman Sachs on Wednesday to nearly halve their forecast for U.S. growth in the third quarter. They now forecast gross domestic product growth of 5.5 percent between July and September, a sharp cut from their previous estimate of 9 percent. That dragged their full-year forecast by 0.4 percentage points to 6 percent for 2021.
“The impact of the Delta variant on growth and inflation appears to be slightly greater than we expected,” said economists at the bank. “Spending on food, travel and some other services is likely to decline in August, although we expect the decline to be modest and brief.”
Federal Reserve officials also appear to be more attuned to the risk that the economy may not reopen or the job market may not recover as smoothly as initially expected amid Covid-19 concerns. Chairman Jay Powell claimed at the latest monetary policy meeting in July that the economic impact of the Delta variant may not be as great as previous outbreaks, but minutes from that meeting suggest increased awareness that rising cases are any reversal of their stimulus.
“Covid risks are re-emerging as a very important downside risk,” said Jonathan Millar, senior US economist at Barclays. “It’s back on the [Fed’s] radar and the wording in the minutes gives them the freedom to control the tapering.”
Government bond yields, the backbone of global financial markets, have skyrocketed this month. But in recent days, they have slipped to a six-month low, underscoring continued demand for the port securities as the economic picture has faded.
“Nobody is pointing at things and saying they’re cheap,” said John Leonard, head of equities at Macquarie Asset Management. “The argument is that we all know the party has to end at some point, but it’s not really time to leave the party yet because the alternatives are pretty unappealing.”