Blog

Text size

The stock market dropped Monday, after news that China is imposing more Covid-related restrictions. That’s a near-term problem, but markets are more focused on inflation and earnings.

The

Dow Jones Industrial Average
fell 164 points, or 0.5%.

The S&P 500
dropped 1.2%, while the

Nasdaq Composite
declined 2.3%. The tech-heavy Nasdaq was the biggest loser out of the three indexes Monday. It had seen an impressive gain last week, rising almost 5%, more than double the gains on the other two indexes.

“Headlines that Macau will be shut down for a week due to a wave of Covid cases is what has caught investor attention,” wrote Michael Reinking, senior market strategist at New York Stock Exchange. 

After having lifted restrictions in May, China is reimposing them, as a new variant spreads. Several cities are halting businesses and Macau is shutting down casinos. 

Companies that derive a chunk of their sales from China are seeing their stocks get hit hard.

Wynn Resorts

(ticker: WYNN) stock dropped 6.5%, while

Las Vegas Sands

(LVS) stock fell 6%. Even

Nike

(NKE) and

Starbucks

(SBUX), which don’t see quite as much of their sales from China compared to those casino operators, saw their shares drop 2.5% and 1.7 %, respectively. 

Apple

(AAPL) and

Tesla

(TSLA), which both see a chunk of sales from China, saw their stocks fall 1.5% and 6.6%, respectively. That was also weighing on the Nasdaq, as the two companies’ market capitalizations add up to just over $3 trillion, or over 16% of the Nasdaq’s aggregate market capitalization. 

The China situation could reverse soon. Once the spread of the variant eases, China would likely reopen again, as it did in the spring.

Putting China’s Covid policy changes aside, the stock market has come a long way from just a few weeks ago. The S&P 500 closed Monday 6% above its intraday low of the year, hit in the second half of June. The market has risen as expectations of an economic slowdown have also brought about the expectation that the Federal Reserve’s interest rate hikes—meant to cool high inflation—will slow down by early next year. 

“This bounce… is being driven by the idea that rates may have peaked, inflation may have peaked, and Fed hawkishness may have peaked,” wrote Tom Essaye, founder of Sevens Report Research. “We’ll need some proof that’s actually happening, and if we don’t get that proof don’t be surprised if we see another 5%-10% drop in the S&P 500.” 

So the real test for stocks will come Wednesday, when the consumer price index is released. Economists are forecasting a second consecutive inflation reading of above 8%. A result less than that would fuel the narrative of slower rate hikes and potentially a market rally, while a fairly high result would spur bets of a continually aggressive rate hiking path and a market selloff. 

While the inflation data will certainly matter, so will corporate earnings. Before the earnings reports, the stock market was moving mostly on the back of macro developments, wrote Dennis Debusschere, founder of 22V Research. And while the market certainly will not ignore inflation—and its implications for interest rates—companies that report earnings will see their stocks move based on their own profit trends, some of which will be impacted by movements in rates.

“Earnings will be very revealing, the outlook for the 2nd half more so, as far as the state of consumer demand and the impact of inflationary pressures on profit margins and revenue growth,” wrote Louis Navellier, founder of Navellier & Associates.

Thursday sees the start of earnings season, with Wall Street financial giants leading the charge as

JPMorgan Chase

(JPM) and

Morgan Stanely

(MS) report results, with

Citi

(C) and

BlackRock

(BLK) following on Friday.

Overseas, the pan-European

Stoxx 600
declined 0.5%, and Hong Kong’s

Hang Seng Index
tumbled 2.8%.

Here are some stocks on the move Monday:

Twitter

(TWTR) dropped 11% after

Tesla

CEO Elon Musk said in a filing late Friday that he is terminating his deal to buy the social-media group. Musk says

Twitter

breached terms of the agreement by refusing to provide detailed information about fake accounts. Twitter intends to force Musk to proceed, and a lengthy legal battle is expected.

Alibaba

(BABA) fell 9.3% after a Chinese regulator fined it for disclosure violations.

Lululemon Athletica

(LULU) stock dropped 4% after getting downgraded to Underperform from Hold at Jefferies. 

Under Armour

(UAA) stock fell 4% after getting downgraded to Hold from Buy at Jefferies. 

Honeywell International

(HON) stock edged 0.3% lower even after getting upgraded to Buy from Neutral at Bank of America. 

Write to Jacob Sonenshine at [email protected] and Jack Denton at [email protected]