Most Wall Street strategists agree that Monday’s decline — fueled by gaping concerns over the rapidly spreading COVID-19 Delta variant — should serve as a wake-up call for investors who have sent stock prices to lock in valuations. to lay.
And they also generally agree on what could push stocks even lower from here — a subpar Q2 earnings season chock full of worrying guidance amid the ongoing uncertainty of the pandemic.
“This market is vulnerable to a larger pullback or correction if a new negative is introduced, and that negative could be revenue shortfalls,” warns Tom Essaye, founder of Sevens Report Research, in a research note to clients. “If calls for corporate earnings warn of (1) margins (as suggested by a few companies) or (2) general economic activity (if management says activity declined at the end of June as COVID cases accelerated), that combined will be with the other problems (extended valuations, complacent investors, summer doldrum trading) to cause a real pullback or correction of 10% or more.”
The bulls attempted a triumphant attack on Tuesday to appease the bears emerging from hibernation for the first time in months. The Dow Jones Industrial Average (^DJI) rose more than 530 points in afternoon trading, keeping pace with economically-focused names such as American Express (AXP), IBM (IBM) and Goldman Sachs (GS).
Small cap stocks as measured by the Russell 2000 (^RUT) also rose strongly.
Despite Tuesday’s market reversal, fear lingers after Monday’s steep sell-off. Spurred on by increasing COVID-19 infections worldwide, investors reasoned that economies should once again close due to the increased number of infections. Or at the very least, the economic recovery from the depths of the pandemic would grind to a halt once mobility restrictions are reintroduced.
The Nasdaq (^IXIC) and S&P 500 (^GSPC) recorded their largest declines in nearly two months. Meanwhile, the 10-year benchmark had been biggest drop in more than three months. The Dow Jones Industrial Average fell more than 900 points, marking its worst decline since October 2020.
The Dow Jones Transportation Index (^DJT) — which tracks the performance of economically sensitive names such as FedEx (FDX) — slipped deeper into correction territory (10% below its highs).
Even the often Teflon stock known as Apple (AAPL) lost 3%.
Some of the only winners from Monday’s thrashing were the popular 2020 home trades – for example, Peloton (PTON) gained 8% and Etsy (ETSY) was up 3.5%.
“This market is vulnerable to news that yesterday’s decline could turn into something material,” said Essaye. However, the strategist continues to view dips in the market as buying opportunities, largely due to low interest rates and the existence of COVID-19 vaccines.
But others on the street are more cautious, preferring to watch the action right now rather than seeing market dips as attractive entry points into stocks. Their common reason: the pandemic is far from over, and the market realizes that best and quickly.
“I’m not saying we don’t… [economic] recovery, but what it did for me? [Monday’s sell-off] was just reminding me that COVID is creating an uncertainty and maybe some bumps, some bumps along the way. It won’t be smooth sailing,” Lori Calvasina, RBC’s head of US equity strategy, told Yahoo Finance Live. “This is not a market that can absorb bad news.”
Monday’s market knock proves that theory.