Wall Street Investors Got Reminder Of COVID-19’s Impact

Wall Street got a painful reminder of the threat the coronavirus pandemic poses to the economy Monday, and a big early gain for stocks suddenly flipped to losses after California rolled back its reopening plans amid a spike in cases.

The S&P 500 fell 0.9%, with all the losses accumulating in the last hour of trading, after California said it will extend closures of bars and indoor dining across the state, among other restrictions. It's one of many states across the U.S. West and South where coronavirus counts are accelerating and threatening the budding recovery that just got underway for the economy.

California slows reopening

The announcement from California, which accounts for nearly 15% of the country's economy, combined with an escalation by the White House in its tensions with China to knock the market down from its earlier gain of 1.6%.

Technology stocks took the hardest hits, highlighted by Microsoft's swing from an early gain of 1% to a loss of 3.1%. It's a sharp step back for tech-oriented giants, which have been cruising higher through the pandemic on bets that they can keep growing almost regardless of the economy.

"There's an increasing sense that the recovery from the virus related shutdown is going to be more drawn out, more uneven than maybe the market was looking for," said Willie Delwiche, investment strategist at Baird. "And you add on top of that a number of tech companies that had run up tremendously over the past couple of weeks, so there's a little bit of shaking out there as well."

The tech losses helped drag the Nasdaq composite down 226.60 points, or 2.1%, to 10,390.84. The Dow Jones Industrial Average squeaked out a gain of 10.50 points, or less than 0.1%, to 26,085.80. It had earlier been up 563 points. The S&P 500 dropped 29.82 to 3,155.22.

In a signal investors are downgrading their expectations for the economy, Treasury yields fell and smaller stocks did worse than their larger rivals. The Russell 2000 index of small-cap stocks lost 1.3%.

The volatility struck markets just as Corporate America is set to tell Wall Street how badly the pandemic hit their bottom lines.

The country's biggest banks are slated to report their results today, including JPMorgan Chase, and the expectations are almost universally dreadful across the S&P 500.

Analysts say the biggest U.S. companies likely saw their earnings per share plummet nearly 45% from April through June, compared with year-ago levels. That would be the sharpest drop since the depths of the Great Recession in 2008, according to FactSet.

Investors are expecting banks, which traditionally kick off each earnings season every three months, to say they've had to set aside billions of dollars to cover loans potentially going bad due to the pandemic-caused recession.

"The most important thing is COVID-19 data," said Darrell Cronk, chief investment officer of Wells Fargo Wealth and Investment Management. "That's going to affect whether we have to slow down or stop economic activity in the back half of the year."

China tensions

Also adding to nervousness in the market was the White House's decision to reject nearly all Chinese maritime claims in the South China Sea. The world's largest economies have been sparring over everything from the coronavirus pandemic to human rights.

The yield on the 10-year Treasury fell to 0.61% from 0.63% late Friday. It tends to move with investors' expectations for the economy and inflation.

Benchmark U.S. crude fell 1.1% to settle at $40.10 per barrel. Brent crude, the international standard, fell 1.2% to $42.72 per barrel.