Stock markets fall to 2022 lows on inflation, COVID worries

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Stock markets plunged to their lowest level in more than a year on Monday, extending a five-week rout as investors weighed the prospect of interest rate hikes and COVID-19 lockdowns in China.

The Dow Jones fell 654 points, or nearly 2%, to close at 32,246. The broad-based S&P 500 fell 3.2%, to 3,991, while the heavy-tech Nasdaq lost 4 .3%.

It’s the fifth consecutive week of losses for the S&P 500 – its longest losing streak since 2011, according to data provider FactSet.

“The focus remains on inflation, rising interest rates and the war in Ukraine,” Brian Price, head of investment management at Commonwealth Financial Network, said in a note. “The combined factors of tight supply chains resulting from China’s zero Covid policy and rising oil and food prices due to the war in Ukraine, are causing inflationary fears that are triggering an outflow from risky assets.”

Not only have stocks fallen, but assets ranging from bitcoin to crude oil have also fallen.

Much of the damage was the result of the aggressive pivot from the Federal Reserve, which did all it could to support financial markets and the economy in an attempt to aggressively rein in inflation. In March, the central bank drawn its main short-term interest rate from its all-time high of near zero, where he sat for almost the entire pandemic. Last week he reported the possibility of additional increases double the usual amount in the coming months, in an aggressive effort to stamp out the high inflation that is sweeping the economy.

The moves, by design, would slow the economy by making borrowing more expensive. The risk is that if it raises rates too far or too quickly, the Fed could cause a recession. In the meantime, higher rates discourage investors from paying very high prices for investments, as investors can get more than before by holding ultra-safe Treasuries instead.

It helped cause about 29% tumble for bitcoin since the beginning of April, for example. The cryptocurrency fell 10.8% on Monday, according to Coindesk.

Concerns about China, the world’s second largest economy, also weighed on investors. Analysts cited comments over the weekend from a Chinese official warning of a dire jobs situation as the country hopes to halt the spread of COVID-19.

Shanghai authorities have tightened restrictions again, amid complaints from citizens the lockdown seems endless – just as the city was emerging from a month-long strict lockdown after an outbreak. The fear is that China’s strict anti-COVID policies will further disrupt global trade and supply chains, while dampening its economy, which for years has been a key driver of global growth.


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Reduced expectations

During the pandemic, stock prices have remained high despite the economic turmoil as large US corporations have been able to make big profits.

But this last season of earnings releases has generated less enthusiasm. With companies posting stronger-than-expected earnings overall for the final quarter, there are plenty of signs discouraging future growth.

The number of companies citing “weak demand” in their earnings calls has risen to its highest level since the second quarter of 2020, strategist Savita Subramanian wrote in a report by BofA Global Research. Tech profits are also lagging behind, she said.

The technology sector is the largest in the S&P 500 by market value, giving it additional leverage for market moves. Many tech-focused companies have seen their profits soar during the pandemic as people seek new ways to work and play while cooped up at home. But their slowing earnings growth makes their shares vulnerable after their prices soared so high on expectations of continued gains.

Even the energy sector, star of recent weeks, was under pressure on Monday. Benchmark U.S. crude fell to $102.31 a barrel in electronic trading on the New York Mercantile Exchange, but is still up more than 40% this year. Brent crude, the oil pricing basis for international trade, fell slightly to $105.94 a barrel.

The yield on the 10-year Treasury fell to 3.05% from 3.12% on Friday night, but remains more than double the level of 1.51% where it started the year.

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