For months, Wall Street was sleepwalking towards what every health expert said would be a terrible fall and winter. Now, a harsh reality is setting in.
Coronavirus infections are surging in the United States and much worse in Europe. Investors are suddenly spooked. The Dow plunged roughly 800 points, or 3%, Wednesday. That leaves the index down more than 1,600 points on the week.
The big fear is how much worse the pandemic will get — and whether government restrictions to fight the spread will derail the fragile economic recovery. Those concerns are magnified by the risk of post-election chaos and Washington’s failure to reach a deal on a stimulus package. That means the economy is entering this precarious period without a safety net.
“Coronavirus is coming back with a vengeance. And that’s leading to a sell-first, ask-questions-later mentality,” said Ryan Detrick, chief market strategist at LPL Financial.
None of this should be shocking. The leading health experts have long warned that coronavirus infections would spike as people move indoors during the cooler weather this fall and spring. Yet the S&P 500 was still trading near record highs just two weeks ago.
“I think the market missed this one. Investors were almost thinking we were going to avoid it. Now the market is being caught flatfooted,” said Detrick.
‘Reality is hitting home’
That market optimism was driven by easy money from the Federal Reserve, hopes for federal relief from Congress and progress on a vaccine.
“Nothing is to be gained by pretending that the pandemic and the economic pain it has caused are coming to a swift end,” David Kelly, chief global strategist at JPMorgan Funds, wrote in a report to clients.
David Joy, chief market strategist at Ameriprise, agrees that the rising rate of infections is the primary culprit behind this week’s selloff. He pointed to how market volatility metrics have climbed in the United States and Europe this week, but not Asia, where the pandemic is under better control now.
“It makes you wonder why it’s coming as a surprise,” said Joy. “Other than the fact that reality is hitting home now that we have to deal with it all over again. You can’t ignore it anymore because it’s here. And it’s in Europe in an even bigger way.”
Former FDA chief Scott Gottlieb warned that the United States is on a “trajectory to look a lot like Europe,” where infections have skyrocketed in Germany, France and Switzerland in recent weeks.
“I think things are going to get worse” here, Gottlieb told CNBC on Wednesday.
Europe is cracking down
French President Emmanuel Macron plans to announce stricter efforts to fight the pandemic Wednesday. Germany and Switzerland could do the same.
Gottleib said that while “broad stay-at-home orders” may not return to the United States, there will likely be “targeted” efforts to stop the spread in hot spots.
Hit by a wave of infections, Illinois announced Tuesday a ban on indoor bar or dining services in Chicago. The state is also requiring that all outdoor dining, gaming and casinos must close at 11 pm.
“There is nothing surprising about this to me,” said Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence.
Booth, a former Fed official, pointed out how coronavirus infections similarly soared this summer in the Sunbelt when people moved inside to avoid the heat and humidity.
The worsening pandemic is coming at a very challenging time.
The good news is the US economy has rebounded from the depths of the recession in April. The housing market and consumer spending are strong. Economists expect US GDP grew at an annualized pace of 31% during the third quarter. That would be a record. And the unemployment rate has dropped to 7.9%
Intensifying pandemic will hurt the economy
But the bad news is that the recovery has been uneven and the pace of job growth has slowed. Major companies including Charles Schwab, Boeing and Disney have all announced mass layoffs recently. JPMorgan doesn’t expect the economy will regain all the jobs lost during the pandemic until 2022.
“There continue to be wide swaths of the US economy which simply cannot get back to normal in a worsening pandemic, including travel, leisure, entertainment, restaurants and bricks-and-mortar retailing,” said JPMorgan’s Kelly.
The risk is that the resurgence of the health crisis will hurt consumer spending.
It’s easy to see how some Americans will stay home and avoid crowds, regardless of what restrictions are imposed by mayors and governors.
“For some Americans, Christmas just moved inside. And they’re not going to visit anyone for Thanksgiving,” said Booth, the former Fed official.
According to Gallup, 28% of Americans plan to spend less money this holiday season — the highest percentage since 2012.
Stimulus is on hold. Now what?
Beyond the pandemic, consumer spending is being restrained by the deadlock in Congress over a fiscal stimulus deal. That failure means funding to small businesses, enhanced unemployment benefits and stimulus checks are on hold, indefinitely. The CDC’s eviction moratorium expires at the end of the year.
There is no guarantee a lame-duck session of Congress will be able to reach a deal on stimulus — especially because the timing and result of the election remains unclear. Stimulus may have to wait until January.
“This is a consumption-driven economy. No matter how you want to slice it, we are sliding back into recession as we speak,” said Booth.
Joy, the Ameriprise strategist, is more optimistic.
“The economy probably has enough momentum to continue to recover,” he said. “That’s not to say the simultaneous impact of the virus with no stimulus can’t slow it down.”
If a slowdown does materialize, don’t count on the Fed to save the economy again. At least that’s the startling message from a former top Fed official.
“No central bank wants to admit that it’s out of firepower. Unfortunately, the US Federal Reserve is very near that point,” Bill Dudley, former NY Fed chief, wrote in a Bloomberg News opinion story Wednesday.
The Fed has already slashed interest rates to zero, purchased trillions of dollars of bonds and backstopped corporate debt.
“This means America’s future prosperity depends more than ever on the government’s spending plans,” Dudley wrote, “something the president and Congress must recognize.”