NEW YORK (AP) – A rally on Wall Street waned on Thursday, the second time this week that a big early gain threatened to give way in the afternoon.
The S&P 500 is up 1.1% one hour from the end of trading after increasing to 2.5% previously. The first larger gains came after the Federal Reserve launched its latest unprecedented effort to support the economy through the coronavirus epidemic.
The central bank has announced plans to provide up to $ 2.3 trillion in loans to households, local governments and small and large businesses as the country learns what economists say is the worst recession in decades. This is the latest massive initiative from the Fed, which has rushed to ensure that liquidity reaches the sectors of the economy that need it after markets collapsed at the instigation of investors who have removed cash from the system.
The stock market is not the economy, and this distinction has become even clearer this week. The S&P 500 is expected to increase by more than 11% this week, even though the government announced Thursday that 6.6 million Americans had applied for unemployment benefits last week as layoffs swept the country. It would be the best week for the index since November 2008.
This is because stock market investors are continually looking to the future in a few months or more. From mid-February to the end of March, they lowered inventories by a third due to the impending severe recession, before the economy really started to crack.
In recent weeks, however, investors have pushed the market up more than 20% following massive aid pledged by the Fed, other central banks, and governments around the world, even as the evidence stands. accumulate that fears of recession were premonitory. This week, some investors also began to consider the possibility that the economy may reopen amid signs that the outbreak may peak or plateau in several of the hardest hit areas in the world.
“The market only focuses on the number of cases,” said Quincy Krosby, chief market strategist at Prudential Financial. “The question is when can the restrictions be lifted? This is what the market is focusing on, when will America reopen? “
The Dow Jones Industrial Average was up 265 points, or 1.1%, at 23,705 at 3:14 p.m. EST. It had risen 575 points earlier, but the gains faded after the price of oil took another steep turn. It’s a trend this week.
The Nasdaq composite was practically flat.
Many professional investors are skeptical of the recovery, saying there is still too much uncertainty. They say forecasts for a relatively rapid economic rebound after a deep recession are overly optimistic. Although it is hoped that a plateau will arrive for infections in several hot spots, this is not guaranteed. Meanwhile, businesses continue to close, and one in 10 American workers has lost their job in the past three weeks.
“You usually have very strong rebounds, even in a bear market,” said Krosby of the markets where stocks fell more than 20%. “The question is whether we plan to sell in this rebound or not, or can we continue to profit from it.”
The big market gains this week were somewhat hesitant. On Tuesday, the S&P 500 registered an initial gain of 3.5% before disappearing in the last few minutes of trading. On Thursday, the index rebounded from a gain of 2.5% to a more modest gain of 0.5%.
The weekend is also looming, the stock market being closed on Friday for the holidays. The stocks have been selling regularly on the last day of the week recently as some investors seek to exit the market before more bad news builds up over the weekend.
The huge Fed programs announced on Thursday affect large sectors of the credit markets, and if they continue over the long term, they could encourage investors to take too much risk and lead to market bubbles.
But in the short term, “what the Fed is doing is great and helps the markets to function and provide liquidity so that investors can do what they need (and want) to do,” said Warren Pierson, deputy director of investments at Baird Advisors.
The programs even include bonds for companies that have sufficiently low credit ratings to qualify as “junk” or speculative.
Concerns have been raised about the colossal amount of corporate debt that is concentrated at the bottom edge of the high quality “investment” category. The impending recession could push much of this to “unwanted” status, which would force many investors to sell it because they only have to hold top quality bonds. A leakage of these bonds could trigger sales in other market sectors and cause further suffering in the economy.
New Fed programs include some support for bonds that were at the bottom of the investment grade category as of March 22, but which were then downgraded to the highest level of the junk. Exchange traded funds that follow the junk bond market increased by almost 6%.
Also in Fed programs, municipal bonds allow cities and state governments to raise funds. In normal market trading, 15 buyers may bid for a particular bond. But just a few weeks ago, there were 15 sellers for each buyer, according to Gabe Diederich, portfolio manager at Wells Fargo Asset Management. All the selling difficulties have brought prices down more than they should otherwise, even for high quality bonds. This makes it more difficult for local governments to borrow.
Stock markets around the world have also risen. The German DAX posted a return of 2.2%, the French CAC 40 increased by 1.4% and the FTSE 100 increased by 2.9%. The Nikkei 225 from Japan remained virtually stable, while the Kospi from South Korea increased 1.6% and the Hang Seng in Hong Kong 1.4%.
The collapse of the US stock market coincided with another sharp drop in oil. US benchmark crude oil lost $ 2.33, or 9.3%, to $ 22.76. It had been above $ 28 earlier today, according to speculation that Russia, Saudi Arabia and other large producers may announce a sharp cut in production after their meeting on Thursday. Energy demand withered as economies closed to slow the spread of the virus and the world was flooded with oil.
Brent crude lost $ 1.36, or 4.1%, to $ 31.48 a barrel.
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