Stock markets fall to lowest levels of 2022 on inflation, COVID worries

Stock markets plunged to their lowest level in more than a year on Monday, extending a five-week rout as investors weighed the prospect of interest rate hikes and China's COVID-19 lockdowns.

The Dow fell 654 points, or nearly 2%, to close at 32,246. The broad-based S&P 500 fell 3.2%, to 3,991, while the heavy-tech Nasdaq lost 4.3%.

It's the fifth straight week of losses for the S&P 500 — its longest losing streak since 2011, according to data provider FactSet.

"The overwhelming focus continues to be on inflation, rising interest rates, and the war in Ukraine," Brian Price, head of investment management at Commonwealth Financial Network, said in a note. "The combining factors of tight supply chains resulting from China's zero Covid policy, and rising oil and food prices due to the war in Ukraine, are causing inflationary fears that are triggering a move out of risk assets."

Not only did stocks fall, but so did assets from bitcoin to crude oil.

Most of the damage has been the result of the Federal Reserve's aggressive pivot from doing everything it can to prop up financial markets and the economy to trying to aggressively tame inflation. In March, the central bank pulled its key short-term interest rate off its record low of near zero, where it sat for nearly all the pandemic. Last week, it signaled the possibility of additional increases of double the usual amount in upcoming months, in an aggressive effort to stamp out the high inflation sweeping the economy.

The moves, by design, would slow the economy by making it more expensive to borrow. The risk is that if it raises rates too far or too quickly, the Fed could cause a recession. In the meantime, higher rates discourage investors from paying very high prices for investments, because investors can get more than before from owning super-safe Treasury bonds instead.

That's helped cause a roughly 29% tumble for bitcoin since April's start, for example. The cryprocurrency dropped 10.8% Monday, according to Coindesk.

Worries about China, the world's second-largest economy, also weighed on investors. Analysts cited comments over the weekend by a Chinese official warning of a grave situation for jobs, as the country hopes to halt the spread of COVID-19.

Authorities in Shanghai have again tightened restrictions, amid citizen complaints the lockdown feels endless — just as the city was emerging from a month of strict lockdown after an outbreak. The fear is that China's strict anti-COVID policies will add more disruptions to worldwide trade and supply chains, while dragging on its economy, which for years was a main driver of global growth.

Diminished expectations

Over the course of the pandemic, stock prices have stayed high despite economic tumult because large U.S. companies have been able to rake in significant profits.

But this most recent earnings reporting season has yielded less enthusiasm. While companies overall are reporting bigger profits than expected for the most recent quarter, plenty of signs are discouraging for future growth.

The number of companies citing "weak demand" in their earnings calls jumped to the highest level since the second quarter of 2020, strategist Savita Subramanian wrote in a BofA Global Research report. Tech earnings are also lagging, she said.

The tech sector is the largest in the S&P 500 by market value, giving it additional weight for the market's movements. Many tech-oriented companies saw profits boom through the pandemic as people looked for new ways to work and entertain themselves while locked down at home. But slowdowns in their profit growth leave their stocks vulnerable after their prices shot so high on expectations of continued gains.

Even the energy sector, a star performer in recent weeks, was under pressure Monday. Benchmark U.S. crude fell to $102.31 a barrel in electronic trading on the New York Mercantile Exchange, but is still up more than 40% this year. Brent crude, the basis for pricing oil for international trading, edged down to $105.94 a barrel.

The yield on the 10-year Treasury note fell to 3.05% from 3.12% late Friday, but remains more than double the 1.51% level where it started the year.