Virus Cases Pop, Stocks Crash: What Wall Street’s Saying

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Stocks plummeted severely Thursday as investors took note of a resurgence in coronavirus cases. Wall Street, while cautious for the immediate period, remains confident that the current sell-off may not be as ugly as March’s. Wall Street is comforted as the Federal Reserve has made clear it intends to provide unlimited stimulus. 

All three major U.S. indices got hammered Thursday, with the S&P 500 down 5.89%. The 10-Year Treasury yield fell to 0.67% fro 0.73%. Yields fall when prices rise. The S&P 500 is down 7% since Wednesday, when stocks were at a high post-March 23, the date that marked the bear market low. A 10% drop from Wednesday’s level marks a correction. 

According to data from Johns Hopkins, the 5-day moving average of new virus cases is now 27,000, up from a prior reading of 11,000 earlier in the month. States like Florida and Texas have seen a spike, which may cause these states to reconsider reopenings. Of course, more lockdowns would keep the economy in recession for longer than anticipated.

Recently, economic data like manufacturing activity and unemployment have trended positively, but that would likely be reversed if state reopenings slow down. 

The S&P 500 was 4% below its all-time high last week, pricing in a near-perfect recovery and leaving the market vulnerable to risks. The index is now 11% below its all-time-high. 

Other risk assets like high yield bonds also sold off, creating wider credit spreads. The iShares iBoxx High Yield Corporate Bond ETF  (HYG) - Get Report, a widely tracked high yield fund, fell more than 2%. As risk sentiment was poor to start the week, spreads have loosened and likely loosened some more Thursday. High yield spreads — the additional yield investors demand over that of the 10-Year Treasury in return for credit risk — are near 6%, according to the St. Louis Fed. Historically, a healthy spread can be below 5%. 

Investors are hoping the Fed’s bond purchasing programs can keep spreads from widening enough to discourage lending, a near negative to the economy. 

Sectors hit particularly hard in Thursday's market carnage were banking, with the Invesco KBW Banking ETF  (KBWB) - Get Report down 9% and airlines. United Airlines  (UAL) - Get Report fell 16%. 

Here’s what Wall Street’s saying: 

Matthew Harrison, Biotech Analyst, Morgan Stanley: 

"Our analysis demonstrates higher testing is not the main driver of new cases. We conclude active community spread is likely still ongoing.”

Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance: 

"Today the market woke up to news that should have been apparent to anyone who lives outside the New York tri-state area: people in the rest of the country are out and about, largely not wearing masks and not keeping 6 feet apart.

Ipek Ozkardeskaya, Senior Analyst, Swissquote Bank: 

“If investors start jump-shipping on news that a second wave would lead to another period of confinement and economic shutdown, then the global stock markets would be hit by another wave of a severe sell-off. This time, however, the dip could be limited as those who regret being too skeptical regarding the Federal Reserve’s (Fed) capacity to resuscitate the market and missed the latest rally, would probably take the second chance to join the party without too much hesitation.”

Jasper Lawler, Head of Research, London Capital Group: 

"We now know that rates will be pinned to near zero through 2022 and that the Fed will increase its Treasury and MBS [mortgage backed securities] purchases over coming months at least at the current pace.” 

Steve Friedman, Former Staffer, NY Fed, Macroeconomist, MacKay Shields:

"The different facilities that they [the Fed] have outstanding -- they certainly can be expanded. Yes, if risk assets perform poorly here, we will see some widening, but ultimately the Fed as a backstop likely prevents the extent of the widening. If virus cases are indeed increasing, if states have to go back to some form of lockdowns, it really becomes a matter of fiscal policy. Fiscal policy needs to step up again and ensure that households have adequate cash flow.”

Jamie Cox, Managing Partner, Harris Financial Group: 

"This was long overdue. If you were lamenting the fact you missed the last 2,000 points, now's your chance to remedy that mistake.” 

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