Equities fall the hardest since May on China worries, Fed

Wall Street stocks closed significantly lower on Monday, reflecting losses overseas and causing the S&P 500 index to drop its largest in four months.

Concerns about highly indebted Chinese real estate developers – and the damage they could do to investors around the world if they default – spread across the markets. Investors are also concerned that the Federal Reserve could signal this week that it plans to pull back on some of the support it has given to markets and the economy.

The S&P 500 fell 75.26 points, or 1.7%, to 4,357.73, its largest drop since May. The benchmark index temporarily lost 2.9%, the biggest decline since last October. The S&P 500 was down for two weeks and is on track for its first monthly decline since January. The S&P 500 has run for 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 points. The blue chip index briefly lost 971 points. The Nasdaq fell 330.06 points, or 2.2%, to 14,713.90 points. The Hang Seng, Hong Kong’s main index, fell 3.3% for its biggest drop since July. The European markets fell by around 2%.

“What happened here is that the list of risks has finally gotten too big to ignore,” said Michael Arone, chief investment strategist at State Street Global Advisors. “In a seasonally challenging time for the markets, there is simply a lot of uncertainty.”

Concerns over Chinese property developers and debt have recently centered on Evergrande, one of the largest Chinese real estate developers, which appears to be unable to repay its debts.

It is feared that a possible collapse there could trigger a chain reaction through the Chinese real estate development industry and spill over to the entire financial system, similar to how the failure of Lehman Brothers sparked the 2008 financial crisis and the Great Recession. These real estate companies have been major drivers of the Chinese economy, which is the second largest in the world.

If they fail to pay their debts, the heavy losses suffered by investors holding their bonds would raise concerns about their financial strength. These bondholders could also be forced to sell other, independent investments to raise cash, which could hurt prices in seemingly independent markets. It’s a product of how closely global markets are interconnected, and it’s a concept that the financial world calls “contagion.”

Many analysts say they expect China’s government to prevent such a scenario and that it doesn’t look like a Lehman-like moment. Still, any hint of uncertainty may be enough to anger Wall Street after the S&P 500 has risen almost continuously since October.

In addition to Evergrande, several other worries lurk beneath the mostly calm surface of the stock market. In addition to the Fed’s potentially announced announcement that it will ease the accelerator on helping the economy, Congress could opt for a destructive game before allowing the U.S. Treasury Department to borrow more money and weighing on the COVID-19 pandemic continue the world economy.

Regardless of what was the biggest cause of the market swooning on Monday, some analysts said such a decline was due. The S&P 500 hasn’t seen even a 5% decline from its high since October, and the almost unstoppable surge makes stocks look more expensive and make fewer mistakes.

All of the concerns have led some on Wall Street to predict impending falls in stocks. Morgan Stanley strategists said Monday that conditions could mature to cause the S&P 500 to decline 20% or more and that growth could slow sharply.

Even if the economy can avoid this worse-than-expected slowdown, Morgan Stanley’s Michael Wilson said stocks could still fall about 10% if the Fed eases support for the markets. The Fed will release its latest update on economic and interest rate policy on Wednesday.

Earlier this month, Stifel strategist Barry Bannister said he expected the S&P 500 to decline 10% to 15% over the last three months of the year. He cited, among other things, the throttling of their support by the Fed. So did the strategist at Bank of America, Savita Subramanian, who set a target of 4,250 for the S&P 500 by the end of the year. That would be a decrease of 4.1% compared to the closing price on Friday.

Tech companies led the broader market down. Apple lost 2.1% and chip maker Nvidia lost 3.6%.

Banks posted huge losses as bond yields fell. This affects their ability to charge more lucrative interest rates on loans. The 10-year government bond yield fell to 1.31% from 1.37% late Friday. Bank of America lost 3.4%.

Oil prices fell 2.3% and weighed on energy stocks. Exxon Mobil was down 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 top all winners in the S&P 500. Delta Air Lines was up 1.7% and United Airlines was up 1.6%.

Cryptocurrency traders also had a tough day. Bitcoin’s price fell nearly 8% to $ 43,717, according to Coindesk.

Investors will have an opportunity to take a closer look at how the downturn has affected a variety of companies when the next round of corporate earnings kicks off in October. Solid earnings were a major driver for stocks, but supply chain disruptions, higher costs, and other factors could make it harder for companies to meet high expectations.

“The market’s greatest strength this year could turn into its greatest risk,” said Arone.

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