Wall Street’s earlier bets that the economy can make a relatively quick rebound from the coronavirus pandemic suddenly don’t look so good.
The S&P 500 fell 1.7% Wednesday for its second straight loss, with the biggest hits targeting companies that most need a healthy economy for their profits to grow. Treasury yields also sank in a sign of pessimism after Federal Reserve Chair Jerome Powell warned about the threat of a prolonged recession.
Powell said the U.S. government may need to pump even more aid into the economy, which is bleeding millions of jobs every week. His comments came one day after the top U.S. infectious diseases expert, Dr. Anthony Fauci, warned of the dangers of reopening the economy too soon. Together, they threw some some cold pessimism onto hopes rising recently among some investors that growth could resume later this year as economies reopen.
“At this stage now, we think there are more risks to the downside than the upside,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “Consumers in general are going to be more wary and more interested in boosting savings rates and are unlikely to come back to a world of consumption anywhere near what it looked like before,” she said.
The S&P 500 fell 50.12 points to 2,820.00.
The Dow Jones Industrial Average dropped 516.81 points, or 2.2%, to 23,247.97, and the Nasdaq composite lost 139.38, or 1.5%, to 8,863.17.
It’s the latest wobble for a market that has been wavering in recent weeks after coming off its best month in a generation.
The S&P 500’s 26% rally got going in late March following promises of massive aid from the Federal Reserve and Capitol Hill.
It then accelerated on optimism as several countries and U.S. states began relaxing restrictions on businesses that were meant to slow the spread of the coronavirus but also caused a severe recession.
The U.S. stock market was down from the start Wednesday as investors worried about the risks of reopening economies from coronavirus shutdowns too soon.
Powell urged Congress and the White House to take more action to prevent long-term economic damage, warning that many small businesses and households could still go bankrupt.
At the same time, new clusters of infections have appeared as nations struggle to balance reopening economies with preventing a second wave of deaths.
Markets will essentially be in wait-and-see mode for the next two to four weeks as investors gauge how reopenings are going, analysts said.
“No one, and I mean no one, including corporations, wants to wear the scarlet letter for being responsible for the secondary outbreak,” Stephen Innes of AxiCorp said in a commentary. “So while re-openings may occur, they will only happen in a gradual context where social distancing rules permit or workplace safety can be exercised.”
Wall Street hoped to recover some losses from a rough Tuesday, but all three major indexes were already under water in early trading.
Traders assessed what new steps the government may need to take to prevent more wreckage to the economy because of ongoing shutdowns.
Fauci’s video testimony before the U.S. Senate Tuesday reverberated in global markets.
“Over and above the recent resurfacing of cases in countries such as China and Germany, Dr. Fauci’s comments pack in more arguments against a rapid reopening of U.S. states which had been supported by President Donald Trump and fueled the gains seen for U.S. markets of late," Jingyi Pan of IG said in a report.
Stocks retreated in London, Tokyo and Paris, but reversed early losses in Shanghai.
Warning of prolonged recession
Creating more concern, Powell warned of the threat of a prolonged recession resulting from the viral outbreak and is urging Congress and the White House to act further to prevent long-lasting economic damage.
The Fed and Congress have taken far-reaching steps to try to counter what is likely to be a severe downturn resulting from the widespread shutdown of the U.S. economy.
The latest implementation of that came Tuesday, when the New York Fed began buying funds to support the corporate bond market.
Treasurys were some of the first investments to signal the economic devastation coming from the pandemic. The yield on the 10-year Treasury was steady at 0.66% on Wednesday, down from 0.72% late Monday. It tends to fall when investors are downgrading their expectations for the economy and inflation.
Powell warns that there still could be widespread bankruptcies among small business and extended unemployment for many people.
“Deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy,” the chairman says in prepared remarks before an online discussion with the Peterson Institute for International Economics. “Avoidable household and business insolvencies can weigh on growth for years to come.”
The U.S. government “ought to do what we can to avoid these outcomes, and that may require additional policy measures,” Powell says.
He says the Fed will “continue to use our tools to their fullest” until the viral outbreak subsides but gives no hint of what the Fed's next steps might be.
Virus reemerges in some areas
Governments have been loosening restrictions as they try to staunch the economic carnage from pandemic shutdowns, despite signs of fresh outbreaks in some countries, such as China and South Korea.
In China, where the virus first surfaced, authorities announced seven new cases on Wednesday. Six were in Jilin province, in the northeast, where alert levels were raised and rail connections suspended.
South Korea reported 26 additional cases of the coronavirus over the past 24 hours amid a new spike in infections linked to nightclubs in Seoul.
Pakistan, meanwhile, confirmed 2,000 new positive coronavirus cases in a single day, just days after its prime minister, Imran Khan, eased lockdown restrictions and stepped up the return of Pakistanis stranded overseas despite pleas for stricter controls by Pakistan’s medical professionals.
Around the world
Britain’s FTSE 100 slipped 0.9% to 5,941 after official figures showed the British economy shrank by 2% in the first quarter of the year from the previous three-month period as restrictions on economic activity were ramped up ahead of a coronavirus lockdown that began in late March.
The CAC 40 in Paris sank 1.7% to 4,398. Germany's DAX lost 1.4% to 10,665.
Tokyo’s Nikkei 225 index lost 0.5% to 20,267.05 and the Hang Seng in Hong Kong ended lower, down 0.3% at 24,180.30.
The Shanghai Composite index gained 0.2% to 2,898.05 and South Korea’s Kospi jumped 1% to 1,940.42 after the government said it needed more time to assess recent outbreaks and would not immediately re-impose new restrictions to fight the virus.
Australia’s S&P ASX 200 gained 0.4% to 5,421.90, while shares in Taiwan surged 0.5%.
The latest on oil
A barrel of U.S. oil to be delivered in June rose 11 cents to $25.89 per barrel in electronic trading on the New York Mercantile Exchange. On Tuesday, it gained $1.25 to $26.33. Brent crude, the international standard, gained 30 cents to $30.28 per barrel.
— Compiled and edited by ArLuther Lee for The Atlanta Journal-Constitution.
