Market’s Covid Angst Returns After Weeks of Being Tamped Down

On the first day of a new year, an old enemy resurfaced in markets — virus angst — which sent stocks careening to their worst opening session in five years amid concern about the budding economic recovery.

Coronavirus infections climbed above85 million globally, fueling worries over potentially more stringent restrictions. Boris Johnsonimposed a third lockdown across England. In the U.S., vaccine distribution has beenslow to start even as hospitalizations reached a record of 125,544 nationwide.

Markets withered, with the S&P 500 Index falling 1.5%, its worst decline to start a year since 2016.

“Some of it is the same story from 2020. People are anticipating some Covid spikes, and that translates into increased shutdowns coming back into play,” said Victoria Fernandez, chief market strategist for Crossmark Global Investments. “In that story, 2021 is really no different than 2020. Markets are still going to have that knee-jerk reaction to Covid headlines.”

There were other factors weighing on the markets. At almost 30 times reported earnings at the end of December, the benchmark was fetching the highest multiple to greet a new year in at least six decades, according to data compiled by Bloomberg. And traders became jittery over Tuesday’srunoff elections in Georgia, which could determine whether Democrats have control of Congress.

A bleak day at the start of a year doesn’t necessarily spell doom for the market, if history is any guide. Over the past 90 years, the S&P 500’s move on the first day, up or down, has foreshadowed the whole year only 53% of the time.

Still, the U.S. didn’t suffer through a Covid pandemic in those past nine decades. And the fact that vaccines aren’t being distributed as quickly as the government has promised was a cause for worry.

In a note last week, Goldman Sachs economists led by Jan Hatzius said “near-term vaccine news has worsened recently.” The team cited data from the Good Judgment Project, which sees about a 25% probability that 25 million vaccine doses will be distributed by the middle of January. That compares with a probability of 88% two weeks ago.

“There’s a lot riding on the vaccine rollout going smoothly,” said Alec Young, chief investment officer at Tactical Alpha LLC. “The market got too far ahead of itself in pricing in a really smooth process and this is a logistical challenge. Under the best of circumstances there would be challenges — this shouldn’t be a surprise — but I think people were on vacation and the market just got a little carried away.”

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The change is a marked shift from the mindset that ruled at the end of 2020, when companies including Pfizer Inc. and Moderna Inc. announced positive data for their Covid-19 vaccines, reviving trades that benefit more from economic growth.

On Monday, a Bloomberg basket of stay-at-home stocks had its best day since November versus another basket stuffed with reopening plays. Real estate, utilities and industrials stocks led the retreat. The tech-heavy Nasdaq 100 fell as much as 2.7% before paring losses.

From the Georgia Senate seat runoff elections, to softer earnings guidance, to any kind of intervention by regulators to quash the exuberance in cryptocurrencies, there are plenty of potential catalysts in coming weeks to stir up market turmoil, according to Mike Wilson, chief U.S. equity strategist at Morgan Stanley.

“We must acknowledge that the ‘risk reward’ of the U.S. equity market has deteriorated materially and the market is ripe for a drawdown,” Wilson wrote in a note.

— With assistance by Sarah Ponczek, and Claire Ballentine

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