Jerome Powell and Anthony Fauci have finally wiped that “What, me worry?” smile off Wall Street’s face. It’s about time.
After a blistering rally fueled largely by irrational exuberance or cabin fever, US stocks plunged Thursday, a third straight day of losses and the biggest drop in three months.
The Dow Jones industrial average fell 1,862 points, or 6.9 percent, as investors confronted mounting evidence the economy isn’t bouncing back like a Bozo the Clown punching bag any time soon. Also pushing stocks lower: jitters over a second wave of coronavirus infections that could slow efforts to reopen businesses.
Powell, who chairs the Federal Reserve, said Wednesday that “a significant chunk” of the nearly 20 million Americans still out of work may never return to their old jobs or industries, as employers adjust to the realities of a post-pandemic world where retailers, restaurants, airlines, movie theaters, and a vast range of other businesses no longer draw customers like they once did.
He was also blunt about the economic outlook: “The extent of the downturn and the pace of recovery remain extraordinarily uncertain and will depend in large part on our success in containing the virus.”
But news on the pandemic front has been mixed. Hard-hit states including Massachusetts, New York, and New Jersey are seeing sustained declines in infections. But the country continues to record about 20,000 new cases and 1,000 deaths each day, and 19 states, including California, Florida, and Texas, have reported increases.
“We have something that turned out to be my worst nightmare,” Fauci, director of the National Institute of Allergy and Infectious Diseases, said Tuesday, referring to the virus. The infection won’t “burn itself out with mere public health measures . . . We’re going to need a vaccine for the entire world."
The COVID-19 concerns, combined with Powell’s sobering comments, have investors reconsidering the optimism behind their buying spree over the past 10 weeks. Major indexes had soared more than 40 percent since bottoming out March 23.
“The Fed provided a reality check for markets," said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management in Boston.
Miskin noted the Fed’s estimate that the economy will not recover fully until the latter part of 2021, and that the jobless rate would remain high, contradicting expectations for a fast “V-shaped” recovery that fueled the recent rally.
“In our view, the bounce in stocks likely went too far too fast, and they could potentially trade in a choppy sideways fashion while we wait to see further light at the end of the tunnel,” he said.
Let’s hope that isn’t the headlight of the COVID-19 express.
The Dow, which ended the day at 25,128, has shed almost 9 percent this week. The Wilshire 5000 Total Market index, which tracks most US stocks, has fallen 7.5 percent, erasing $2.6 trillion in market value.
“After the greatest and perhaps strangest market rally from the lows in 50 years, stocks have finally hit some turbulence over the last few days,” said Michael Arone, chief investment strategist at State Street Global Advisors in Boston. “When the dust settles, I expect the economy to rebound later this year, supported by incredible fiscal and monetary policy support.”
On Thursday, the Labor Department said initial claims for unemployment pay fell to 1.5 million last week, from 1.9 million a week earlier. But the ranks of Americans collecting jobless benefits remain extraordinarily high at 29.5 million, or 18 percent of the pre-pandemic labor force.
In Massachusetts, new claims fell to 65,600 for the week ended June 6, compared with 81,300 for the previous week, according to state data. The totals include standard unemployment claims and those under a federal program that made gig workers, independent contractors, and others eligible for benefits for the first time.
The jobs recovery following the 2007-2009 financial crisis was painfully slow, in part because the Great Recession was the longest downturn since World War II. Unemployment didn’t return to its pre-crisis low of 4.4 percent until mid-2017, nearly eight years after the recession ended.
Bruce Monrad, chairman of Northeast Investors Trust in Boston and a fixed-income fund manager, said this time around shouldn’t be as bad. That’s because this recession was caused by an outside shock — the pandemic — and is likely to last just a few months.
“This is more akin to the 9/11 shock,” he said. “I really do think we won’t have to retool the country.”
Monrad has a good point. We still have a chance to rebound quickly.
But that requires a fast reopening of the economy. And as the past month has shown, we don’t have the coronavirus contained, and we lack the testing and tracing resources to wrestle the disease into submission, at least so far.
Houston-area officials said Thursday that they are “getting close” to reimposing a stay-at-home order, a warning that came one day after the region reported its biggest one-day jump in COVID-19 cases.
Yes, patience — a virtue hard to find on Wall Street — will be required.