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Dow Closes Down 730 Points as Coronavirus Cases Surge, What a Second Round Would Mean for the Stock Market

June 27, 2020


New York Stock Exchange, June 2020  


Dow closes down 730 points as coronavirus cases surge

Fred Imbert and Thomas Franck  

CNBC, June 26, 2020

Stocks ended sharply lower Friday amid concerns over the rising number of coronavirus cases in the U.S. and its impact on the economic recovery.

The Dow closed down 730 points, or 2.8%. The S&P 500 slid 4.2%, and the Nasdaq dropped 2.6%.

Those losses were major averages’ second weekly drop in three weeks. The Dow and S&P 500 fell 3.3% and 2.9%, respectively, while the Nasdaq lost 1.9%.

“Coronavirus cases are spiking and re-openings are being delayed, which at a minimum will impact earnings,” said Tom Essaye, the founder of The Sevens Report. “The resurgence in coronavirus cases is raising concerns that the rebound may be short-lived as voluntary or potentially more government mandated economic shutdowns are becoming increasingly likely.”

Texas Gov. Greg Abbott said Friday the state will roll back some of its reopening measures as coronavirus cases and hospitalizations continue to rise. “At this time, it is clear that the rise in cases is largely driven by certain types of activities, including Texans congregating in bars,” Abbott said in a release.

Florida announced it would suspend “on premises consumption” of alcohol at bars in the state after reporting a surge of nearly 9,000 new virus cases. In Arizona, the number of cases jumped by 5.4%, topping a seven-day average of 2.9%. At a nationwide level, the daily average number of confirmed coronavirus cases is now more than 33,000.

Shares of companies that would benefit from an economic reopening tumbled. United Airlines, American and Delta all slid more than 3%. Cruise operator Norwegian Cruise line dropped 5%.

Jon Hill, rates strategist at BMO, said virus fears are making investors rethink positions ahead of the weekend, which is similar to the trading action seen in March and April. This is favorable for bonds and negative for stocks, as investors worry the economy may not rebound as sharply as expected. “It’s very possible some of the optimism we saw in the datas could pull back hard in July and August.”

The U.S. 5-year Treasury yield dropped to a record low of 0.29%. The 3-year rate also slid to an all-time low of 0.17%. Yields move inversely to prices.

Banks under pressure after Fed stress test

The Federal Reserve’s annual stress test of the major banks showed some banks could get close to minimum capital levels in scenarios related to the coronavirus pandemic.

Because of this, banks must suspend share repurchase programs and cap dividend payments at current levels for the third quarter. Wells Fargo and Capital One may be forced to cut their dividends, according to a Morgan Stanley analyst.

“While I expect banks will continue to manage their capital actions and liquidity risk prudently, and in support of the real economy, there is material uncertainty about the trajectory for the economic recovery,” Fed Vice Chair Randall Quarles said.

The announcement sent some bank shares lower on Friday. Bank of America and JPMorgan Chase both fell more than 5%. Wells Fargo slid 7.4% and Goldman Sachs fell 8.7%.

Meanwhile, Nike shares slid 7.6% on the back of a surprising quarterly loss for the apparel giant. The company reported a loss of 51 cents per share and revenue of $6.31 billion for its fiscal fourth quarter. Nike’s quarterly revenue reflected a drop of 38% on a year-over-year basis.

The losses on Friday came despite a record rise in consumer spending in May. The Commerce Department reported Friday that spending increased 8.2% last month, a positive sign for the U.S. economy amid a growing number of negative coronavirus headlines.

The government’s report on how much Americans spent on goods and services in May was the largest one-month gain dating back to records beginning in 1959. Consumer spending represents more than two-thirds of economic demand in the U.S.


What a second round of coronavirus lockdowns would mean for the stock market

Chris Taylor, Money

MSN, June 27, 2020

U.S. stocks have weathered COVID-19 disruptions surprisingly well. But hopes for a fast and smooth recovery are growing dimmer.

So far the stock market has remained surprisingly sanguine in the face of the economic and human toll of COVID-19. Now as new virus hotspots emerge in the U.S., investors are having to reassess.

Even with stay-at-home orders, a total of 47 million jobless claims, and a national death toll of 124,000 and rising, the S&P 500 is actually down only 6% year-to-date. From the lows of March 23, it is up almost 40%.

Part of that positivity stems from expected curve-flattening, that much of the world has experienced. As societies and businesses gradually reopen, economic engines can rev up once again.

In the U.S., however, the virus is showing no signs of burning out. With a new record of 38,762 positive tests on June 24, the viral chart implies a second wave – or, rather, a first wave that never really ended.

So that raises the question: If another set of lockdowns proves necessary, in new hotspots like Texas, Florida, Arizona or California, what does that do to economic projections – and, in turn, stock values?

“It’s clear to me that we’re not going back into a national lockdown, but what people should expect are rolling periods and rotating areas of reopening phases,” says David Rosenberg, founder and president of Toronto’s Rosenberg Research.

“No doubt that will hold back our recovery, which is what has undermined the market in recent sessions. Large states like California and Texas and Florida are a huge chunk of national GDP, so that is a clear negative that will impair recovery in the third quarter.”

For equity investors, it’s like playing a game of 3D chess. Stock-picking is a challenging business at the best of times: But now investors are operating in an environment where new data is coming in by the minute, states are tweaking directives almost every day, and the usual metrics like forward price-to-earnings ratios are so foggy as to be almost unusable.

“The economic picture has been gradually improving, with greater spending and investment,” says Gregory Daco, chief U.S. economist for analytics firm Oxford Economics. “But the situation is evolving very rapidly, much more rapidly than we have ever been accustomed to. And we are starting to see worrisome signs of a stalling in economic activity, due to a renewed rise in cases.”

Lockdown redux?

One way to deal with those climbing numbers, of course, would be to go back into some version of lockdown. Texas, for instance, has paused its reopening as it grapples with record cases, and its hospital systems strain near capacity.

But the public appetite for stay-at-home measures, after months of Americans going stir crazy, seems close to nil. And states vary so wildly in their experiences – New York and New Jersey have already gone from “basket cases” to “beacons of success,” says Rosenberg – that broad national directives may not be applicable.

What is more likely is a patchwork system of local response, and stepped-up promotion and enforcement of partial measures like mask-wearing and social distancing. All of which will help, but economies won’t really be let loose until the “Big Kahuna” of a vaccine eventually comes along, says Rosenberg.

So what does all this mean for equity investors? While a continued caseload is obviously not our hoped-for outcome, neither is it necessarily a sign to flee for the market exits. That is because lockdown measures, as we learned from the initial wave, don’t automatically mean a dearth of economic activity.

There is a shift in how and when consumers spend, to be sure — but it doesn’t necessitate that everything grinds to a halt. “There is a general misunderstanding that the contraction of economic activity was due to lockdown, but that has been proven wrong,” says Daco. “The evidence shows that was not the case.”

Also remember that the stock market is never a perfect reflection of the economy. For instance, in this case, equities have indirectly been supported by massive intervention from the Federal Reserve: Historically, stocks are an attractive place to be during eras of low interest rates, since bonds return almost nothing in comparison. And U.S. is still seen globally as a safe haven for assets, as funny as that may sound at the moment.

What to expect next year

Of course, not all stocks are created equal, especially in such a unique moment as this. The market has essentially “bifurcated,” says Rosenberg: Some sectors – tech, consumer staples, homebuilders, healthcare – are breezing along quite nicely. Others are feeling real existential pain – such as financials, insurance companies, and vulnerable small-caps.

Longer term, the outlook is brighter than you might think. Chicago-based research firm Morningstar projects a 5.1% U.S. GDP drop for 2020, followed a robust 5.6% recovery in 2021. Long-term by 2024, it expects only a 1% GDP hit compared to pre-Covid expectations.

What seems clear is that after such a quick snap-back from March lows, we can now expect a slower and bumpier recovery for the market going forward. With the playing field constantly shifting under our feet, it’s hard to draft a consistent playbook – because tomorrow you might need an entirely new one.

“In times like this, forecasters have to be humble,” says Daco. “You have to know what you don’t know.”


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