Stock Market Pares Losses, but Dow, S&P 500 Fall Nearly 2%

Stock Market Pares Losses, but Dow, S&P 500 Fall Nearly 2%

Dow closes about 600 points lower as concerns over indebted property developer China Evergrande spur broad retreat

Sept. 20, 2021

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Worries about spreading troubles from China’s property market snapped an extended streak of calm in stock indexes and sent the S&P 500 to its worst day since May.

The growing concerns over property developer China Evergrande Group, which has the biggest debt burden of any publicly traded real-estate management or development company in the world, triggered a rush out of riskier assets such as stocks, oil and bitcoin, and into safer ones. The Dow Jones Industrial Average dropped 614.41 points, or 1.8%, to 33970.47, dragged down by shares of Caterpillar Inc. and financial heavyweights such as Goldman Sachs Group Inc.

The S&P 500 dropped 1.7%, and the technology-focused Nasdaq Composite Index fell 2.2%, after being down more than 3% earlier Monday afternoon. The S&P 500 and Nasdaq are on track for their worst months since last September, while the Dow is headed toward its biggest monthly decline since October 2020.

The punishing selloff accelerated midday, sending the Dow down as much as 972 points at its low of the session, before the blue-chip gauge pared some losses.

The declines were broad, with all 11 S&P 500 sectors recording declines, and only five stocks in the entire index—four of them airlines—eked out a gain of more than 1%. The selloff also was global: The Hang Seng Index in Hong Kong fell 3.3% to its lowest close since last October, while the Stoxx Europe 600 dropped 1.7%.

Market participants increasingly worry that Beijing will continue efforts to rein in various industries and that it will let Evergrande, which owes tens of billions of dollars to investors around the world, fail and inflict losses on its shareholders and bondholders.

“This is a threat to global growth,” said Ilya Feygin, a managing director at WallachBeth Capital. “What if things worsen? That means a hit to the financial system in China [and] overall economic activity around the world because of China’s importance.”

Concerns over Evergrande struck as investors had grown more cautious about the outlook for stocks, after a booming rally for much of the year. Several investors said that major U.S. indexes were due for a pullback after a nearly relentless dash for records that sent the S&P 500 to more than 50 fresh highs this year.

Money managers have said valuations look elevated and pointed to signs that the economic recovery in the U.S. has lost steam as the Delta variant of the coronavirus has spread. While the Evergrande issue might have been the spark for Monday’s selloff, worries about the global economy and the run-up in the stock market this year had been percolating.

For much of the summer, individual and institutional investors piled into the stock market. Market volatility was low as investors were quick to buy every small dip in the stock market, a favored strategy that helped the broad stock-market gauge recover from its March 2020 low and has sent it up 16% this year.

The mood quickly shifted in September. Many investors were bracing for more volatility in the autumn months, and some on Wall Street said that they were forecasting lackluster returns through the rest of the year. Analysts at firms including Citigroup, Deutsche Bank and Bank of America published notes this month cautioning about risks in the U.S. stock market while others said they expected economic growth to soften.

Some forecasts have grown even darker. Morgan Stanley strategists warned on Monday about the growing likelihood of a decline of more than 20% in the S&P 500.

Investors have been grappling with a number of risks, including higher inflation. This week, investors will be closely tracking the Federal Reserve’s monetary policy meeting and how the central bank will navigate dialing back its support to financial markets.

“We are definitely being a little more cautious at this point,” said Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management.

Yields on 10-year Treasury notes slipped to 1.308% from 1.369% Friday as bond prices rose, recording their biggest one-day yield decline since Aug. 13.

Shares of energy and financial companies were among the worst performers on Monday, and companies in sectors that are exposed to China’s resource-hungry economy experienced big declines. Freeport-McMoRan lost 5.7%. Goldman Sachs shares dropped $13.33, or 3.4%, to $378.13, their biggest decrease since June.

The uncertainty surrounding global growth and more volatility in the fall months has triggered many investors to turn to the options market to hedge against bigger swoons in stocks, traders and analysts say. The Cboe Volatility Index, a gauge of expected swings in the S&P 500, rose to 25.71.

Hong Kong-listed shares of Evergrande, which said Sept. 13 it was facing unprecedented difficulties, tumbled more than 10% to their lowest closing level in a decade. Mainland Chinese markets were closed for a holiday.

“Everyone is looking at Evergrande and saying, ‘Has the time come for a major default in that area, and then the potential for contagion into the broader property sector?’ ” said Edward Park, chief investment officer at Brooks Macdonald. “It’s an imminent risk now rather than being a theoretical risk as it has been for the past few years.”

China’s leaders are pushing Evergrande and other real-estate companies to reduce their debts, as they try to tame the mainland’s housing markets after years of runaway growth. A domestic bank-loan repayment was due by Evergrande on Monday, with a 24-hour grace period, according to Deutsche Bank strategists. Payments on domestic and dollar bonds are due Thursday.

“When you have the combination of worries like you have today—deleveraging, Evergrande, the internet sector—then you get more volatility,” said Frank Benzimra, head of Asia equity strategy at Société Générale.

Some analysts said that they didn’t expect Evergrande’s financial woes to trickle into other parts of the world, and that the stock-market selloff would be short-lived. Mr. Benzimra said Evergrande was unlikely to lead to a “Lehman moment” akin to the financial shocks that followed the collapse of Lehman Brothers in 2008.

JPMorgan analysts said in a note on Monday that the market selloff was exacerbated by technical factors such as options hedging as well as poor liquidity. They considered Monday’s selloff an “overreaction.” And some investors did step in toward the end of the trading session. The S&P 500 was down 2.9% at its low of the day, the largest intraday decline since January, before paring some of those losses.

“Our fundamental thesis remains unchanged, and we see the selloff as an opportunity to buy the dip,” wrote a team led by JPMorgan’s Marko Kolanovic in a note Monday.