By Anna Hirtenstein and Paul Vigna 

Stocks dropped sharply Monday as coronavirus cases surged in the U.S. and Europe, adding to worries about the economic outlook after Congress and the White House failed to agree on a much-anticipated fiscal stimulus deal.

Major indexes opened lower, and the declines accelerated into the afternoon.

The Dow industrials fell 650 points, or 2.3%, the worst day for the blue chips since Sept. 3. The S&P 500 dropped 1.9%, and the Nasdaq Composite fell 1.6%.

Among the biggest decliners were the travel and leisure stocks, like Royal Caribbean Group, United Airlines Holdings and Marriott International, that have come under the most pressure this year during the pandemic.

"The ability to fight the virus further right now is very much in question, and it's a political question," said Steven Wieting, chief strategist at Citi Private Bank. It could be months before anything gets done in Washington, and that's got investors tentative, he said.

The U.S. reported 60,789 new cases Sunday, down from recent record-setting levels, but up from a week earlier. Scientists had been expecting cooler weather to lead to a second wave of the disease, but it is coming earlier than many had anticipated. That is prompting fresh concerns about tighter lockdown restrictions and the effect on the economy.

"It's a worrying picture for sure. You may have to account for the possibility that by midwinter, there might be circuit breakers implemented," including stringent short-term shutdowns, said David Stubbs, head of investment strategy at J.P. Morgan Private Bank. "But we always knew this recovery would be stop-start: We won't be truly moving into the main part of a new cycle until the health-care issue itself is dealt with."

House Speaker Nancy Pelosi told CNN on Sunday that she was expecting more answers regarding an aid package on Monday and that an agreement could be reached this week among lawmakers. But Democrats and White House officials are blaming each other for the lack of progress after the two sides went into the weekend without a deal, dimming hopes for an agreement before Nov. 3.

A selloff here isn't surprising, said Esty Dwek, head of global market strategy at Natixis Investment Managers. Last week the market was optimistic about stimulus aid, and this week those hopes have been leveled somewhat. "It's just one of those mornings where we're looking at the glass as half empty," she said.

Moreover, some polls suggest key Senate races are tightening, Ms. Dwek said, cutting into expectations of a takeover that would allow Democrats to pass an aggressive stimulus package after the election. "The blue wave might not be as much of a given," she said.

Investors are still tuned into third-quarter earnings season. A heavy calendar this week includes Microsoft, Caterpillar, Apple, Amazon.com, 3M, ConocoPhillips and Alphabet.

The critical element isn't necessarily the results themselves, said Fawad Razaqzada, an analyst at ThinkMarkets, but the corporate outlooks for the next few quarters. If executives start pointing to weaker earnings growth and a slowing economy, it could cut into the market's momentum, he said. "People are generally optimistic about the future," he said. "This might be a reality check."

The market has been very good to momentum stocks lately, but this selloff is a reversal of that trend, said Andrew Simmon, managing director at Morgan Stanley Investment Management. "The risk was very overbought," he said. "The ingredients were there." He suspects that reversal has further to run, especially given anxiety over the election. But that is muting a different market trend, he said, which is that some investors are already pricing in a recovery next year.

That can be seen in the performance of small-cap stocks, he said, where the Russell 2000 was up more than 9% over the past month before Monday. After the election dust settles, he expects that trend to pick up.

Elsewhere on Monday, the pan-continental Stoxx Europe 600 retreated 1.8%, led by a decline in German stocks.

Coronavirus cases are accelerating in Europe. France reported more than 52,000 new infections Sunday, a daily high. Italy is trying to rein in the spread with new rules, such as the mandatory closure of restaurants and bars at 6 p.m. Spain declared a state of emergency, as it did in March.

In Asia, most major equity benchmarks closed lower. China's Shanghai Composite Index fell 0.8%. Markets in Hong Kong were closed for a public holiday.

Oil prices slipped. U.S. crude oil futures fell 3.2% to $38.58 a barrel. A cease-fire in Libya has led analysts to project the country's output will reach 1 million barrels a day in the next four weeks, up from about half a million a day, according to Bjarne Schieldrop, chief commodities analyst at SEB. The rise in coronavirus infections is also muting prospects for the economic recovery and damping demand, he said.

"We have oil being hit from both sides of the equation. Libya supply is seeing a rapid increase," Mr. Schieldrop said. "At the same time, demand is being hit by a wave of new Covid-19 cases and with new lockdowns."

In bond markets, the yield on the benchmark 10-year U.S. Treasury note declined to 0.802%, from 0.840% on Friday.

The WSJ Dollar Index, which measures the greenback against a basket of currencies, added 0.3%.

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com and Paul Vigna at paul.vigna@wsj.com

 

(END) Dow Jones Newswires

October 26, 2020 16:23 ET (20:23 GMT)

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