Economy concern hammers markets

Virus spikes also cause worst drop since March

A stock market that had clawed within 4.5% of its all-time-high as states reopened economies gave back much of the gains Thursday as COVID-19 cases and hospitalizations spiked amid easing restrictions.

The Dow Jones industrial average plunged more than 1,800 points, its biggest drop since mid-March.

“We spent the past several weeks celebrating an economy that was starting to get back online,” says Jason Ware, chief investment officer and chief economist for Albion Financial Group.

Investors also were spooked by a Federal Reserve that signaled on Wednesday it will likely keep its key interest rate near zero at least through 2022 – a positive for stocks – but also foresees a long recovery that leaves unemployment elevated at 6.5% at the end of 2021. That’s down from the current 13.3% but up sharply from a 50year low of 3.5% in February.

“I think (the Fed’s) concerns about the economy now and for the next year and a half add to the negative sentiment in the market right now,” says Chris Zaccarelli, chief investment officer of Independent Advisor Alliance.

The Dow slid 1,862 points, or 6.9%, to 25,128. The Standard & Poor’s 500 index closed down 5.9% at 3,002. And the tech-heavy Nasdaq dropped 5.3% to 9,493.

The S&P 500 had shot up 45% from its March bottom before this week’s sell-off.

“Stocks were overdue for a pullback after rallying more than 40% off the March lows and pricing in what we believe is an overly optimistic economic outlook,” says Jeff Buchbinder, equity strategist for LPL Financial.

At least a dozen states have reported increasing hospitalizations since

At least a dozen states have reported increasing hospitalizations since Memorial Day, including several states that have been most aggressive in allowing restaurants, shops and other businesses to reopen.

Memorial Day, including several states that have been most aggressive in allowing restaurants, shops and other businesses to reopen.

A vaccine is expected to be available within a year, making Americans more comfortable about visiting public gathering spots. But a longer, more halting economic recovery would likely leave extensive long-term damage as more businesses shut down and more workers are permanently laid off.

“The longer this goes on, the more corrosive this becomes to the foundation of the economy,” Ware says.

Thursday’s selloff also at least partly reflects profit-taking as investors who benefited from a 45% run-up in the S&P since March lock in gains, Ware says.

“This is a pause,” he says, adding that continued progress in state reopenings despite some setbacks, the prospect of a vaccine and continued stimulus from the Fed and Congress should still leave stocks at or above current levels by year’s end.

In the U.S., Texas and Florida were among the states reporting jumps in the number of coronavirus cases after precautions were relaxed last month. The total number of U.S. cases has surpassed 2 million. Globally, India reported a record number of nearly 10,000 new coronavirus cases over the past 24 hours with health services in the worst-hit cities of Mumbai, New Delhi and Chennai becoming swamped by the rising infections.

In South Korea, the latest 45 new cases came in a weekslong resurgence that health authorities said they fear might develop into a massive wave. Such developments have raised alarm, said Stephen Innes of AxiCorp.