Dow dives as optimism wanes
Average declines 1,861 points following Fed report, spike in coronavirus cases
WASHINGTON — The loud noise coming out of Wall Street on Thursday marked investors’ collective exhale, after a spike in coronavirus cases, coupled with a gloomy outlook from the Federal Reserve, popped giddiness that a quick recovery was at hand.
The Dow Jones industrial average skidded 1,861 points, or 6.9 percent, to close at 25,128.17. The Standard & Poor’s 500 index sank 188 points, or 5.9 percent, to settle at 3,002.10. The Nasdaq Composite fell 527 points, or 5.3 percent, to end the day at 9,492.73. It was their worst session in three months and marked a sharp break from the optimism earlier this week that had propelled the
Nasdaq above 10,000 for the first time and pushed the S&P 500 into positive territory for the year.
Oil fell the most since late April, threatening to spoil crude’s recovery from a historic drop below zero.
The market is grappling with record high U.S. oil inventories and an uneven demand rebound as signs mount that a second wave of the pandemic could be taking hold in some states. Oil’s recovery has been driven by production cuts and the easing of pandemic-related lockdowns.
“It was very fast, driven by historically unprecedented OPEC+ cuts and central bank and government support on the demand side,” said Bart Melek, head of commodity strategy at Toronto Dominion Bank. “We should not be surprised to see a pullback, following such a violent rally,” he said.
All 11 S&P stock sectors and every Dow component were in the red. Nervous investors unloaded shares in airlines, cruise lines, energy and hotels that are businesses closely tied to a resurgent economy. The stocks had spiked in recent weeks, helping indexes rebound from their March lows on the hope that the coronavirus dislocations were abating.
One common metric for stocks, known as the price-to-earnings ratio, showed stock prices were way ahead of their historical averages. The S&P 500 had been trading at more than 25 times earnings for the next 12 months compared to its historical average in the 15- to 16times range.
“The market had become more
optimistic and more enamored over a V-shaped recovery in recent weeks,” said Jeffrey Kleintop, chief global investment strategist at Charles Schwab. “Anything that would disrupt that view was a vulnerability. And that’s exactly what we’ve seen in the last day and a half. The potential for a second virus wave and another lockdown is a worry. And there is concern over a possible slower pace of recovery.”
Stocks had rocketed the past few weeks on hope. From March 13 through Monday, airlines jumped 80 percent while banks, plus the leisure and entertainment sectors, climbed by 50 percent.
United, American and Delta airlines had all dropped more than 14 percent on Thursday. Boeing led the Dow fall with a 17 percent drop heading into the final minutes of trading. Norwegian Cruise Lines had fallen 18 percent, and Carnival Corp. was down 17 percent. Walt Disney Co., which is preparing to open some parks, was off more than 8 percent.
The stock retreat began Tuesday but picked up steam on Wednesday after Fed Chair Jerome Powell made plain that a slow recovery was to come and that more aid would be needed from Congress and the central bank to lessen the pain, particularly as jobs for millions of Americans may never return. The Fed plans to keep the benchmark U.S. interest rate at zero, most likely through 2022. But critics say that approach widens economic inequality and lifts Wall Street over Main Street.
President Donald Trump repeated his pledge for a strong, swift recovery and coronavirus vaccine, tweeting Thursday: “The Federal Reserve is wrong so often. I see the numbers also, and do MUCH better than they do. We will have a very good Third Quarter,
a great Fourth Quarter, and one of our best ever years in 2021.” The Fed, and Powell in particular, have routinely been the target of Trump’s ire when the economy falters.
Concerns about a second surge of coronavirus infections have taken on new urgency since states eased restrictions on gatherings and commercial business. Hospitalizations rose sharply in several states after Memorial Day, and nearly 2 million cases have been reported in the United States.
“Fears of a second wave are beginning to cause anxiety in the stock market,” said Torsten Slok, chief economist at Deutsche Bank Securities. “Powell did what he could to be dovish, but there is nothing the Fed can do about the risk of a second wave of the virus.”
Investors may also be selling stocks after prices went up to lock in their gains and offset past losses, or pull out of the market altogether to dodge the continued uncertainty. Airlines and cruise lines traded down double digits on worries that those industries will get back on their feet more slowly because of the virus spread.
Wayne Wicker, chief investment officer at Vantagepoint Investment Advisers, noted that the latest jobs report — which unexpectedly showed that the economy added 2.5 million jobs in May — boosted confidence that the economy was plowing ahead. But those hopes “ignored the fact that the issues with coronavirus responsible for the market decline in the first quarter have not been resolved.”
“With rapid escalation of transmission rates in several states this week, investors are beginning to recognize that their enthusiasm for a rapid return to normal is premature,” Wicker said. Oil prices were down 9 percent Thursday, taking major U.S. companies with them. Dow components Chevron and ExxonMobil were off more around 8 percent.
Oil fell after Powell’s outlook and reports of record inventories in U.S. petroleum reserves in the week ending June 5. The U.S. Energy Information Administration also reported that gasoline stockpiles grew. Stocks in the energy and industrial sectors, which are often pegged to the health of the economy, also dropped.
Higher prices have pushed some producers to turn on the taps. U.S. crude stockpiles rose last week to 538.1 million barrels, according to the Energy Information Administration. That’s the highest level in data compiled by Bloomberg since 1982.
“The surprisingly bearish stats, particularly on crude, the relatively dour comments by the Fed yesterday and fears of a resurgence of the coronavirus have all added to the price weakness today,” said Thomas Finlon, of Houston-based GF International.
Investors have been bullish in recent weeks with bets on rising WTI prices jumping to the highest level in 22 months during the week ended June 2. Data for the week ended June 9 will be released Friday.
Yet crude’s inability to sustain prices over $40 a barrel is leaving many companies across the industry in dire straits.
“A couple months ago, the sector was in complete survivor mode, and it still needs to be, quite frankly,” said Jennifer Rowland, an analyst at Edward Jones & Co. “Even at $45, there will be a lot of companies that can’t survive,” she said. “Companies are still going to be bleeding cash at this level.”
In a more positive sign, data showed that oil demand in the U.K. has been steadily recovering in recent weeks. Still, there’s still a massive glut to be cleared globally, including more than 180 million barrels of crude stored at sea, according to Vortexa data.
The Fed predicts that the unemployment rate will fall to 9.3 percent by the end of this year and to 6.5 percent by the end of 2021. An additional 1.5 million workers filed for unemployment insurance for the first time last week as pandemic-era totals topped 40 million.
Powell has pledged to do everything within the central’s bank’s power to steer the economy toward recovery, and the Fed’s unprecedented response could grow its balance sheet to $10 trillion by the end of the year. But he acknowledged that the tools at Congress’s disposal may be more equipped to directly help individuals, households and companies desperate to stay afloat.
“My assumption is there will be a significant chunk . . . well into the millions of people, who don’t get to go back to their old job . . . and there may not be a job in that industry for them for some time,” Powell said Wednesday.