U.S. Federal Reserve Bank Chairman Jerome Powell.
AFP via Getty ImagesStocks saw their greatest decline in months on Thursday. The Dow Jones Industrial Average closed down 1,862 points, or 6.9%, for the third-straight down day of more than 1% for the index. The S&P 500 dropped 5.9%—also its third consecutive decline and its biggest drop since March. The Nasdaq Composite fell 5.3% from a record high set on Wednesday. And the Russell 2000 index closed down 7.3% after losing 4.5% over the past two days.
Thursday’s declines were broad, with about 498 of the S&P 500’s companies in the red and all 11 sectors down. Airlines, oil companies, retailers, and cruise lines were among the greatest decliners, but relatively coronavirus-immune technology stocks fell too.
Stocks had rallied in recent weeks as U.S. and global economic data began to emerge from the troughs seen in April or May. The Nasdaq Composite index hit record highs and the S&P 500 had turned positive for the year. Talk of a ‘V-shaped’ recovery had become more mainstream, and shares of the economically and coronavirus sensitive stocks soared.
Stocks plunged Thursday, however, as fears grow that a second wave of coronavirus infections could slow the economic recovery in the U.S. and abroad. Federal Reserve Chair Jerome Powell had underlined Wednesday that the economic impact of the coronavirus pandemic would be felt for some time even in a best-case scenario. If a spike in infections necessitates new stay-at-home orders or concerned consumers limit their activities on their own, that economic recovery could take even longer.
News Thursday morning that 1.54 million people filed initial claims for unemployment benefits in the latest week underscored the challenge, even as all 50 states have at least begun to move toward reopening their economies. In a negative sign for the outlook, several of those states have seen increases in coronavirus cases since they began lifting restrictions—including Arizona, Texas, California, and southern states such as Florida and North Carolina. Mass gatherings and demonstrations in cities across the nation likely haven’t helped slow the spread of the virus either.
Coming after a multiweek rally and with stocks at pricey valuations, the market may have been due for a pullback anyway, and recent days’ news have presented the catalyst.
Markets overseas dropped as well. Japan’s Nikkei 225 lost 2.8%, Hong Kong’s Hang Seng fell 2.3%, and Australia’s S&P ASX 100 tumbled 3.1%. In Europe, the Stoxx Europe 600 closed down 4.1%, Germany’s DAX fell 4.5%, the U.K.’s FTSE 100 dropped 4%, and France’s CAC 40 lost 4.7%.
The Federal Reserve’s policy moves on Wednesday weren’t surprising—the bank’s rate-setting committee said that while financial conditions have improved, it will continue to use all tools at its disposal to support the recovery, including purchasing Treasuries and mortgage-backed securities at least at the current pace.
But Powell also made it clear that the recovery will be slow. “It’s a long road,” he said, referring to the more than 20 million Americans who are currently unemployed and the “well into the millions” whom he thinks will be displaced for some years. He made it clear that the bank is not considering raising interest rates, or even thinking about considering doing so.
“The good news is that a dovish near term bridge to the big decisions is now in place and the commitment on interim QE [quantitative easing] and signal on rates will guard against a taper tantrum for the time being,” said Krishna Guha, vice chairman of Evercore ISI.
The Fed can’t solve the coronavirus outbreak with monetary policy tools, however, and the longer it lasts the slower the economic recovery will be.
“Without real economic recovery the market will have to deal with a more significant challenge, which is debt insolvency. That’s why the disconnect between asset performance and economic fundamentals cannot run forever and investors will need to become more rational with their investment approach,” said Hussein Sayed, chief market strategist at FXTM.
Oil also plunged on Thursday, with the price of WTI crude falling 8.2% to $36.34 a barrel. Brent crude dropped 7.6%, to $38.55 a barrel.
Haven assets surged as investors piled out of stocks. The price of gold gained 0.9%, to $1,735.50 an ounce. The yield on the 10-year U.S. Treasury note fell about 10 basis points, or hundredths of a percentage point, to 0.653%, as the price of the securities rose. The U.S. Dollar Index (DXY)—which measures the greenback against a basket of other currencies—ticked up 0.8%.
Bank stocks fell in response to the Fed’s downbeat outlook for the economy and promise of rock-bottom interest rates for years. JPMorgan Chase (ticker: JPM) shares were down 8.4%, Wells Fargo (WFC) shares fell 9.9%, and Bank of America (BAC) stock fell 10%.
Cruise lines, which had been staging a comeback fueled by hope about reopening, also fell. Norwegian Cruise Line (NCLH) shares closed down 16.5%, while Royal Caribbean Cruises (RCL) plunged 14.3% and Carnival (CCL) fell 15.3%.
Airlines also declined, with Delta Air Lines (DAL) losing 14%, United Airlines (UAL) falling 16.1%, and American Airlines Group (AAL) closing down 15.5%.
Energy-related stocks fell on the declining oil price and risk of lower demand in the future if new economic lockdowns are imposed. Occidental Petroleum (OXY) stock tumbled 16%, Halliburton (HAL) lost 15.4%, and Exxon Mobil (XOM) fell 8.8%.
Grubhub (GRUB) shares caught a bid, climbing 4.7% after the food delivery platform agreed to be acquired by Just Eat Takeaway.com in a $7.3 billion all-stock deal.
Beyond Meat (BYND) shares fell 8.1% despite announcing Wednesday that it plans to expand into Europe.
Write to Steve Goldstein at steven.goldstein@wsj.com and Carleton English at carleton.english@dowjones.com
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Stocks Are Plunging as Fed, Virus Cases Fuel Concern - Barron's
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