Why Did Stocks Drop On Monday? Wall Street Reacts To Worries Of COVID Resurgence, Election Turmoil, Delayed Stimulus

Extending a September selloff, stocks plunged Monday on worries of a new wave of COVID-19 in the U.K. and deepening political crises in the U.S.

Major equity indices recovered later in the day from session lows but the S&P 500 still fell 38.37 points, or 1.16%, to 3,281.10, while the Dow Jones Industrial Average plunged 510.9 points, or 1.85%, to 27,146.52. The Nasdaq Composite slipped 14.48 points to 10,778.80.

At one point during Monday’s session, the Dow had fallen 900 points.

The U.K.'s Chief Medical Officer Chris Whitty said the country is now at a “critical point” in the coronavirus pandemic, raising concerns of another national lockdown. London Mayor Sadiq Khan suggested the city may undergo more restrictions to prevent the spread of the virus.

“COVID-19 is now spreading here in London. This is made worse by the uncertainty caused by the lack of testing capacity in the capital,” Khan stated. “The best thing for both public health and the economy is new restrictions imposed early, rather than a full lockdown when it’s too late.”

The FTSE-100 index dropped 3.38% on Monday.

“It seems like the biggest reason for the decline in most global stock markets [on Monday] is the concern that tighter virus restrictions in Europe will result from the new spike in COVID cases now that the colder weather is upon us,” Matt Maley, chief market strategist at Miller Tabak, said in a note.

Dave Wagner, portfolio manager and analyst at Aptus Capital Advisors in Fairhope, Alabama, noted that last week the S&P 500 finished at a six-week low and suffered a third straight weekly decline.

“Recent weakness has largely been chalked up to concerns about crowded positioning and stretched valuations in the growth and momentum factors that have done most of the heavy-lifting during the rally over the last six months or so,” Wagner said.

Investor sentiment was also deflated by a report from the International Consortium of Investigative Journalists which found that a number of global banks — JPMorgan Chase (JPM), HSBC Holdings (HSBC), Standard Chartered Bank, Deutsche Bank (DB), and Bank of New York Mellon (BK) among others — allegedly helped criminals, terrorists and oligarchs to move and launder at least $2 trillion despite making promises to stop such activity.

Shares of Standard Chartered plunged 5.82% in London.

Deutsche Bank, HSBC, JPMorgan and Bank of New York shares dropped 8.2%, 5.58%, 3.1% and 4.93%, respectively.

“[The banks] need to do a better job of shutting down these accounts once they see repeated reasons for filing suspicious activity reports,” Tom Cardamone, managing director of Global Financial Integrity, told Bloomberg. “[There are] clients so bad that numerous [suspicious activity reports] are being filed about them, but no one ever does anything about it.”

Shares of Nikola (NKLA) plummeted more than 19.33% after the company’s founder and executive chairman Trevor Milton resigned following fraud allegations.

Hopes for a new coronavirus stimulus relief bill in Washington may be further complicated by the recent passing of Supreme Court Justice Ruth Bader Ginsburg. President Trump has pledged to name a nominee for the vacant seat as soon as Friday, but Democrats vow to block any such move by the Republicans until after the presidential election.

“The path to a deal looks even more difficult in the wake of the passing of Ruth Bader Ginsburg,” said Wagner. “The market hates uncertainty and that is what this event has caused on multiple fronts.”

Chris Krueger, a strategist at Cowen, wrote in a note that a new COVID-19 stimulus bill is “unlikely until [after the Nov. 3 election] as the fight over Justice Ginsburg’s empty seat will consume D.C.”

Stefanie Miller, managing director of FiscalNote Markets, said that the battle over the Supreme Court vacancy will be the “death knell for COVID-19 relief prior to the elections,” Bloomberg reported.

Miller warned that Republicans will seek to “jam through a [Supreme Court] nominee on the Senate Floor,” while Democrats will seek to impede the Republicans “through dramatic actions such as beginning a whole new impeachment process against Trump and possibly more.”

Wagner observed that the biggest near-term issue for the market is that Ginsburg’s death likely makes a deal on a fifth coronavirus relief package even more of a longshot if [House Speaker] Nancy Pelosi decides to use the government shutdown as a bargaining chip.

“The market has priced in a $1.5 trillion [stimulus] deal, and if it doesn’t come to fruition or if there is skepticism on a deal, the market won’t be happy,” Wagner added.

Noting that some large-cap tech stocks have declined in recent weeks from historic highs, Marc Chaikin, founder of Philadelphia-based Chaikin Analytics, a quantitative investment research firm, said investors should take a “binary approach” to the stock market at this point.

“Remain bullish but raise some cash as technology stocks bounce in the near-term,” he said. “Look for opportunities to redeploy that cash as this short-term pullback plays out over the next two to four weeks.”

Chaikin added that “buying the dips” still makes sense but upside expectations need to be “scaled back.“

As for the upcoming presidential polls, Chaikin noted that he does not expect to see the kind of turmoil some analysts are warning about post-election.

“There is a growing consensus that America will be in turmoil if we have a close election or a [Joe] Biden victory, but I doubt that the majority [of experts] will be correct,” he said. “Looking back to 2016 there was an orderly 9-day decline into the election, with the expectation that Hillary Clinton would win. Instead, we got a Trump victory and a strong rally. So much for the market’s ability to predict election results.”