Thursday was the worst day for stocks since March as investors woke up to the risks of another wave of coronavirus infections and the devastating impact that would have on an already cratering economy. But erly Friday stocks rallied sharply.
So what’s going on?
The S&P 500 plunged 5.9%, a massive pullback that some investors thought had been overdue, with stocks increasingly showing a disconnect from what was happening in the real economy. Every stock in the S&P 500 fell except Kroger, according to Bespoke Investment Group.
The question now is whether an unprecedented intervention by central banks and other policymakers — with more help potentially on the way — will be sufficient for risky assets to steady, or if they will take another leg down.
Some investors think stocks still have more to fall given the hugely uncertain outlook.
“Recent experience suggests that it would be wrong to get too smug about a stock market decline of this size, which finally seems to reflect some of the growing weight of bad news in the global economy,” ING’s Robert Carnell said in a note to clients Friday.
The selloff was driven in part by Federal Reserve Chair Jerome Powell’s remarks that the US jobs market remains in an incredibly weak position, and that the recovery will in large part be defined by the course the virus takes.
But Carnell notes that Powell really just said what everyone already knew: that the global economy is in a bad place, and there won’t be a quick rebound.
JJ Kinahan, chief market strategist at TD Ameritrade, told me that the optimism trade was bound to meet the reality trade at some point, bringing corporate valuations down.
“The reality is as you start to look at the numbers, many of these businesses aren’t going to open up fast enough for the market,” he said.
In recent weeks, the Federal Reserve’s huge expansion of its balance sheet has given investors the confidence to wade back into risky assets. That support hasn’t gone anywhere, and Powell has assured market watchers that the central bank will help out as long as necessary.
More fiscal help could be on the way, too. US Treasury Secretary Steven Mnuchin said Thursday that the White House is considering another round of stimulus checks, the Wall Street Journal reports.
But with the VIX, a measure of S&P 500 volatility, spiking above 40 on Thursday, its highest level since April, the direction of travel for stocks heading into next week is murky.
“Some investor fingers will have been burned. But others will see this as a buying opportunity,” Carnell said. “After [Thursday’s] adjustment, there is no telling which way markets will go.”
