There is a pervading sense on Wall Street that there may be little this week to counter an onslaught of selling ahead of Christmas.
Markets were trading sharply lower Monday to start a truncated week of trading, a period that is notoriously known for thin volumes, which can lead to outsize price swings.
The Dow Jones Industrial Average DJIA, -1.77% was down more than 600 points, the S&P 500 index SPX, -1.63% was off 1.7% and the Nasdaq Composite Index COMP, -1.64% was trading 1.6% lower bringing it down over 7% from its Nov. 19 record close and putting it in range to mark a 10% correction.
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Concerns around the spread of omicron and further COVID lockdowns and new travel restrictions in parts of the world, however, were raising concerns that the market might be headed for a particularly downbeat trading stretch, with little support expected from monetary policy nor fiscal support from the government on the way soon.
Lending some support to that notion, President Joe Biden’s nearly $2 trillion spending plan was in dire straits after Sen. Joe Manchin, D-W.Va., said on Sunday that he cannot support it—potentially handing Biden and Democrats a major political loss and creating doubts about the degree of fiscal stimulus that the economy and markets could see headed in to 2022.
Analysts at Goldman Sachs viewed the lack of progress toward Biden’s Build Back Better initiative as potentially damaging to U.S. gross domestic product. Goldman downgraded the U.S. growth forecasts for 2022, citing the challenges in negotiations.
On top of that, the Federal Reserve appears ready to raise interest rates three times in 2022 to combat out-of-control inflation, with benchmark federal funds rates standing at a range between 0% and 0.25%. And there is an increasing sense that tighter monetary policy—i.e., higher borrowing costs for individuals and corporations—comes at an inopportune time in an attempted recovery from the COVID pandemic that has persisted for more than two years so far.
Other central bankers (with the major exception of China) have also adopted a more hawkish, or less market-accommodative stance, in response to inflation and some market participants fear that this approach may set the table for a major policy error, where tighten leads to a possible economic recession.
“With omicron fears taking hold, coupled with the Fed distancing from their accommodative stance last week, we’re looking at a potential recipe for volatility,” wrote Chris Larkin, managing director trading at E-Trade Financial, in emailed commentary.
“What’s more is the Santa Claus rally comes into question. Meaning that historically the market has tended to enter a bullish phase in the last eight or so trading days of the year. But, with no shortage of macro factors and potentially lighter trading volumes given the holiday, we could see some bumps in the road,” Larkin wrote, referring to a seasonal period that includes the year’s last five trading days and the first two sessions of the new year.
Over the weekend, the Netherlands locked down its population until mid-January, and U.K. officials wouldn’t rule out tighter restrictions before Christmas, with cases hitting records, and 82,886 more confirmed on Sunday. The British Medical Association has warned that almost 50,000 doctors, nurses and other National Health Service staff in England could be off sick by Christmas Day barring further measures.
“Investors who haven’t already checked out for the holidays appear to have taken that move as a sign of economic weakness or at least heightened concerns that the COVID omicron wave could potentially have a negative impact on the global economy and business conditions in the near term,” wrote Colin Cieszynski, chief market strategist at SIA Wealth Management, in a Monday note.
Since the 2008 financial crisis, financial markets have grown accustomed to support from the government and it’s unclear how prospects for the removal of accommodations and tighter financial conditions down the road will impact longer-term investing.
Wall Street already has been struggling to reprice assets that have been viewed as highly valued amid the pricing pressures that have been intensified due to supply-chain bottlenecks and elevated demand.