Wall Street is displaying mounting unease with the increase in Covid-19 caseloads overseas and the potential economic toll of restrictive measures to stave off a public health calamity. As European nations struggle to contain a deadly fourth wave of the pandemic, market observers in the U.S. have been forced to confront the prospect of another winter in which the pandemic remains a key factor in shaping the trajectory of the nation’s economic recovery.
Negative market sentiment was most apparent via the Dow Jones Industrial Average, which closed down 1.4 percent. The broader S&P 500 was roughly flat, closing with a loss of 0.14 percent. The outlier was the Nasdaq which, at 16,057, hit another record close due to its composition of dominant tech stocks that benefited from stay-at-home orders and a population reluctant to mingle with others in enclosed spaces.
“The possibility that Covid will be more serious and longer-lasting in terms of behavior and the economy is being reflected directly in the market today,” said George Ball, chairman of investment firm Sanders Morris Harris. “The possibility that there could be another wave and another variant in the U.S. is weighing on the markets now. It’s not something people expected.”
Austria said on Friday it would reimpose a national lockdown to stem the spread of Covid-19, and the German health minister said that lockdowns could not be ruled out, just a day after the country’s leaders announced more restrictions on unvaccinated people.
“Germany is a big exporter, so that is a concern if Germany does go into a broad lockdown,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors.
With vaccination rates too low to reach herd immunity and a growing number of breakthrough infections, the underlying fear is that the U.S. might be on the cusp of another wave, as well. “I think it’s a bit of a reckoning for what’s going to come. Winter is coming...and with that, you have congregation of people indoors,” said Johan Grahn, head of ETF strategy at AllianzIM. “I think it’s just a prelude in Europe to what seems to be inevitable, and that’s what’s really rattling the markets here.”
I think it’s just a prelude in Europe to what seems to be inevitable, and that’s what’s really rattling the markets here.”
Also looming over Wall Street is uncertainty over President Joe Biden's pick to lead the Federal Reserve for the next four years. The White House has signaled that the top two contenders are current Fed Chairman Jerome Powell and Fed governor Lael Brainard, who is favored by some on the left for her viewpoints on regulation and the role of the central bank in shaping the financial system’s response to issues such as climate change.
Brainard also is perceived as less likely to raise interest rates, which is the Fed’s biggest tool to tamp down runaway inflation. While the investment community in general tends to prefer a more accommodative stance on monetary policy, Horneman said this might be the exception to the rule in that a change in leadership at the world’s most powerful central bank in the middle of a once-in-a-century global pandemic could introduce an unwelcome degree of uncertainty.
“He’s illustrated that he isn’t necessarily a hawk, per se… but yet he’s also realistic,” Horneman said. “There are inflation pressures right now that need to be addressed, especially if we’re talking about additional government spending,” she said, referring to Biden’s signature $1.7 trillion social safety net package that passed the House of Representatives on Friday.
“The biggest thing that continues to be a question mark is the timing of rate hikes,” said Liz Young, head of investment strategy at SoFi. “It would upset the apple cart to have a change. The Fed has driven so much of the market movement over the past two years,” she said, and it is likely to remain highly involved as inflation metrics — and anxiety that it will not be “transitory,” to use the Fed’s preferred term — remain elevated.
Investment experts worry that future supply chain disruptions could strain the resilience of American businesses, workers and consumers at a time when cold weather is bearing down, household costs are rising and pandemic fatigue has become nearly as endemic as the virus itself.
“The risk of a new conflagration of Covid cases would further cripple the supply chain. It could reduce the willingness to re-engage in the job market on the part of millions of potential workers, and at the same time it might add further fuel to the inflation concerns,” Ball said.
The current surge in Europe threatens to fan the flames of higher inflation, said Steve Rick, chief economist at CUNA Mutual Group. “We’re pushing out the supply chain reconciliation,” he said. “It may take longer now with the resurgence.”
Rick pointed out that, to the extent that a new Covid surge curtails travel, it could help lower burgeoning energy costs that have worried lawmakers at home and abroad as winter comes to the Northern Hemisphere. “That would be a little silver lining, but the overall supply chain will be under pressure,” he said.
How long these conditions persist could spell the difference between minimal lasting economic pain and something much grimmer, Young said.
“The timing of it all is really important. It’s about the stamina we have. How much stamina do corporations have to keep eating these higher input costs, and how much stamina do consumers have?,” she said. “I think that’s going to be a very delicate dance."