The train on the run on Wall Street was derailed by a force almost as powerful as easy money: a good deal of reality.
The Dow Jones plunged 1,862 points, or 6.9%, Thursday into the biggest sale since March 16. Even the Nasdaq, which was previously heated to red, fell 5.3% below the level of 10,000.
The large sale was prompted in large part by fears of a resurgence of the coronavirus pandemic which destroyed the economy. Several US states that reopened weeks ago are now reporting an increase in infections and hospitalizations.
Wall Street is unprepared for a potential second wave of the pandemic. This would completely undermine the extreme optimism about the economy that had catapulted US stocks to record highs.
“The recovery in the stock market from the lows of March 23 was just overkill,” said David Kelly, chief global market strategist at JPMorgan Funds. “We are still in a very deep recession. We still have enormous uncertainty about the virus but also about stimuli and politics. ”
But you wouldn’t know by looking at the markets, which have risen even in the face of mostly dreadful economic news. Spurred by an unprecedented stimulus from the Federal Reserve, the S&P 500 jumped 44% from lows. The Nasdaq was up 46% and had already set new highs.
“The market is anticipating a V-shaped recovery. But what you really have is a huge slump, a bump and then a ramp until we get a vaccine,” said Kelly.
“Mass unemployment” won’t go away anytime soon
May’s surprisingly strong employment report, which showed an unexpected increase in hiring, raised hopes for a rapid economic recovery.
But the Department of Labor announced on Thursday that another 1.5 million Americans had filed for unemployment benefits for the first time last week. The good news is that initial requests have dropped for 10 consecutive weeks. The bad news is that the claims are still extremely high.
Before this crisis, the highest weekly number of jobless claims was 665,000 during the Great Recession. In other words, demand is still growing at more than double the previous record pace.
“Mass unemployment is going to be the main condition that defines the economic story for the future,” said Joe Brusuelas, chief economist at RSM International, on Thursday.
Hospitalizations on the rise in 12 states
Meanwhile, the number of coronaviruses has deteriorated in recent days, raising fears of a return to health restrictions that have led to mass layoffs. A second wave would slow the economy, hurt business profits and shake consumer and business confidence.
While trends in hard-hit states like New York and New Jersey continue to improve, there has been an acceleration of cases in some states that have already reopened. Hospitalizations for coronavirus have increased in 12 states since Memorial Day weekend: Alaska, Arkansas, Arizona, California, Kentucky, Mississippi, Montana, North Carolina, Oregon, South Carolina, Texas and Utah.
Morgan Stanley biotechnology analyst Matthew Harrison called the trends “manageable” but noted that they are a “worrisome signal for the fall” when hospital space becomes more limited and people will be stuck inside.
Harrison rejected the argument that the recent surge in cases is mainly due to increased testing.
“We conclude that active spread to the community is likely still underway,” Harrison wrote in a report to customers on Thursday.
An influential model cited by the White House now predicts that daily deaths will decrease in June and July before climbing sharply in September.
“The market is not prepared for a second major wave that would cause further bottlenecks,” said Jeff Kleintop, chief global investment strategist at Charles Schwab.
Despite worsening trends in coronaviruses, Treasury Secretary Steven Mnuchin said the federal government would not detain the entire nation to fight the pandemic.
“We can no longer shut down the economy,” Mnuchin told CNBC on Thursday. “We have learned that if you shut down the economy, you will create more damage, not just economic damage. Medical problems and all that is suspended. ”
However, some parts of the country may need to reduce certain health restrictions if outbreaks occur.
Crashed Airlines and Cruises
Optimism about pandemic trends has led investors to bet in recent weeks on the most exposed stock markets, including airlines, cruises and hotels. This trend is now reversing.
American Airlines fell more than 10% on Thursday, returning part of its incredible 68% month-to-month peak. Spirit Airlines lost 15%, erasing part of its 84% surge in the month before that date.
Likewise, Royal Caribbean and Carnival fell double-digit on Thursday. Both had increased by more than 49% from the previous month.
The energy market also collapsed, with investors selling heavily indebted oil companies like Occidental Petroleum, which fell 13%.
The price of American oil, which had dropped from – $ 40 a barrel on April 20 to $ 40 this week, fell. Crude oil fell 8% to $ 36 a barrel.
“The idea that the hospitality industry, the travel industry or the demand for energy will come back quickly – these are pipe dreams,” said Kelly from JPMorgan.
In the midst of market turmoil, President Donald Trump expressed confidence in the economic and health outlook.
“We will have a great third quarter, a great fourth quarter and one of our best years in 2021,” said Trump. tweeted Thursday. “We will also soon have a vaccine and therapies / remedies. That’s my opinion. LOOK! ”
Dr. Anthony Fauci, the country’s leading infectious disease expert, said he was confident that a candidate vaccine would be shown to be safe and effective by the first quarter of 2021. But some doctors say it is a very optimistic deadline.
Kelly warned that there is no guarantee that a vaccine will work, or that most people agree to take it.
“We could be haunted by this thing for some time to come,” he said.
The massive sale on Wall Street on Thursday will bring back bad memories of the turmoil in February and March that shook the markets.
But Schwab’s Kleintop doesn’t think US stocks will necessarily retest their March 23 lows.
“We may only have to relax a few weeks after the rally,” said Kleintop.
However, given the rapid rise in the stock market during this period, this could be a painful development.