Richard Drew / AP
After a dizzying rally this year, stock markets were hit hard on Monday as a spike in coronavirus infections around the world reinforced the reality of living with a pandemic that refuses to go away.
The Dow Jones Industrial Average fell 725 points, or 2.1%, and had its worst day since October, while the S&P 500 fell 1.6%.
The losses mark a rare day of decline for a market that was at record highs as early as last week.
Here are three essential things to know about the market crash.
What led to the brutal falls?
In a nutshell, COVID-19. Although the vaccine rollout has allowed a semblance of normalcy to return to the United States, countries like Indonesia continue to see infections on the rise, especially those linked to the delta variant of the coronavirus.
The continued rise in cases is starting to scare investors as the world continues to grapple with the economic and health fallout from the coronavirus pandemic.
Among the major declines on Monday were travel and leisure stocks such as United Airlines, which fell 5.5%, and cruise line Carnival, which fell 5.7%.
Concerns about the pandemic come at a time when investors are already worried about inflation. Data last week showed consumer prices rose 5.4% in June from a year earlier, the biggest increase in nearly 13 years.
Although the Federal Reserve has insisted that inflation is transient, not all investors are convinced. Higher-than-expected inflation could force the Fed to put the brakes on the economy sooner, including raising interest rates earlier than in 2023, when it is currently expected to do so.
How worrying are falls?
It’s hard to tell with just one day of falls. These types of declines are not uncommon, but they seem more shocking as markets have so far seen a dizzying run: On Friday, the Dow Jones was up 13.3% for the year, while the S&P 500 was up 15.2% for the year, with both hitting a series of ever-rising records.
In fact, experts have been warning for some time that the markets are likely to suffer a pullback, and it is likely that the markets could remain volatile for some time.
Savita Subramanian, head of US equity and quantitative strategy at BofA Securities, says it’s important to remember that some market volatility is normal, and she called Monday’s falls “not something to write”.
“It’s actually a normal market environment,” she says.
Frédéric J. Brown / AFP via Getty Images
For the most part, analysts still expect market gains to continue, but the pace could slow if inflation and COVID-19 concerns continue to set in.
Valuations are high and investors will likely want to see more confidence that the recent gains are warranted.
So where do the markets go from here?
Much will depend on the trajectory of the economy and the pandemic.
The economy emerges from a blockbuster in the first half of the year. This should be reflected in economic growth data for the April-June quarter due out next week, which should show a meteoric pace of expansion.
This pace of gains is likely to be unsustainable, especially as most of the impact of the government’s stimulus measures wears off.
Bond investors, in fact, have been betting for weeks now that they expect the economy to slow down in the second half of the year, and those bets are now starting to reflect on stocks as well.
A slower, but still strong economy is not a bad thing for the markets. But a lot can still go wrong.
Coronavirus infections could continue to rise. Key sectors of the economy also continue to be hampered by supply chain disruptions and labor shortages. And inflation could prove more difficult to reverse.
“I think common sense will tell you that there will be problems ahead,” said Michael Purves, CEO of investment firm Tallbacken Capital. “And a lot of that will likely weigh on some of the history of the recovery.”