Stocks move lower on Wall Street following a big 3-day rally

Published 3:40 pm Sunday, March 29, 2020

By ALEX VEIGA and DAMIAN J. TROISE

AP Business Writers

Stocks are lower Friday on Wall Street, remaining little changed after Congress voted to pass a big financial rescue package aimed at cushioning ailing businesses and households from the coronavirus crisis.

The selling erased some of the market’s gains after a strong three-day rally that has the major stock indexes on track for their first weekly gain in three weeks. Even after the winning streak this week the market is down 25% from the peak it reached a month ago.

The S&P 500 was down 2.4% in afternoon trading, but is still up just above 11% for the week. The benchmark index shot up 17% over the previous three days as traders became hopeful that Congress would pass the $2.2 trillion economic aid package. The Dow Jones Industrial Average dropped 2.7%. It’s up more than 14% for the week. European markets also fell. Asian markets closed mostly higher.

The bill, which the Senate passed on Thursday, includes direct payments to households, aid to hard-hit industries like airlines and support for small businesses. The business shutdowns that have swept across the country forced 3.3 million Americans to apply for unemployment aid last week, a historic spike.

New government data Friday showed U.S. consumer spending inched up 0.2% last month, matching January’s gain. But economists expect spending will be down sharply in coming months, reflecting the impact of the widespread business shutdowns and layoffs.

The prospect of meaningful financial help to offset the economic damage caused by the coronavirus mitigated some of the concerns about the steep job losses the economy is beginning to see. But the market is likely to see more ups and downs until the outbreak begins to wane, analysts said.

“The key at this point is getting a handle on the spread of the virus so that then we can start to think about what growth looks like for the remainder of the year,” said Willie Delwiche, investment strategist at Baird. “As long as the scope of the virus is still so uncertain it’s really hard to make guesses about where growth is going to slow, and that adds fragility to stock prices.”

Traders need to see good news on the number of virus cases, said Solita Marcelli, deputy chief investment officer, Americas, at UBS Global Wealth Management. “You can’t really stimulate an economy during a shutdown,” she said. “Once we peak, then the markets will reassess.”

Congress’ efforts to deliver financial relief for Americans are taking on more urgency as the outbreak continues to widen. The number of cases in the U.S. has now surpassed those in China and Italy, climbing to more than 86,000 known cases, according to Johns Hopkins University. The worldwide total has topped 550,000, and the death toll has climbed to more than 25,000, while more than 127,000 have recovered.

For most people, the new coronavirus causes mild or moderate symptoms, such as fever and cough that clear up in two to three weeks. For some, especially older adults and people with existing health problems, it can cause more severe illness, including pneumonia, or death.

Investors have yet to get a clear picture of exactly how badly the crisis has hurt corporate profits. Very few companies have dared to issue forecasts capturing the damage, though traders are girding for discouraging results in the next few weeks as earnings reporting season begins.

At the start of this year, analysts expected S&P 500 companies’ earnings would grow 4.4% in the January-March quarter. They now expect earnings will be down 4.1%, according to FactSet.

Earnings for airlines, which have been hit by lost bookings as businesses and individuals canceled travel plans to minimize their risk of contracting the virus, are expected to be catastrophically bad. Delta went from an expected 2.2% decline to a 108% plunge.

Even the current forecasts may not yet reflect the size of the potential earnings declines this year, with only 15% of analysts having adjusted their estimates within the past couple of weeks, according to a report by Credit Suisse.

For all of 2020, the current earnings forecast calls for a 0.7% drop from 2019. Add in more recently updated analyst estimates and full-year earnings are projected to be down 10.1%, Credit Suisse said. Applying the same approach points to earnings being down 7.8% in the first quarter from a year earlier and 21.1% in the second quarter.

“There’s still no sense or scope about what kind of economic damage or earnings damage this will cause,” Delwiche said. “Until we have confidence that’s being reflected in estimates, you can expect more volatility and more uncertainty.”

The losses were widespread Friday, with cruise lines, hotel operators and big retailers among the biggest losers. Norwegian Cruise Line, Royal Caribbean and Carnival led the decliners in the S&P 500. The industry has been among the hardest hit by the economic fallout from the coronavirus. The three cruise operators are down between 70% and 77% so far this year.

In other trading, benchmark U.S. oil was down 5.5% to $21.36 a barrel. Goldman Sachs has forecast that it will fall well below $20 a barrel in the next two months because storage will be filled to the brim and wells will have to be shut in.

The yield on the 10-year Treasury fell to 0.73% from 0.81% late Thursday. It had been as low as 0.77% just before the jobless report was released. Lower yields reflect dimmer expectations for economic growth and greater demand for low-risk assets.

The overall downturn in the markets in recent weeks is creating good opportunities for investors to buy into sectors of the market that will be “prevalent” for the next decade, including e-commerce and technology companies that focus on things like gene therapies, Marcelli said. Both were already expected to grow over the next 10 years, she said, and the virus pandemic is highlighting their importance.

Beyond that, many blue-chip stocks have come way down in price. For example, Apple is down nearly 15% this year, Pfizer is off 21% and JPMorgan Chase has plunged nearly 42%.

Still, investors may want to be measured, as the market is likely to have more big swings ahead.

“This is not a time to make a complete portfolio makeover,” Marcelli said.

The strong rallies this week have prompted some analysts to suggest the worst of the selling could be over. But most expect stocks to touch on recent lows again until there have been enough sustained gains in the market, and progress in fighting the pandemic, to ease investors’ fear of further declines.

“The takeaway from this week is the initial down phase has probably run its course,” Delwiche said. “Investors can get out of the duck-and-cover mode and start to figure out what they need to do. It doesn’t mean that we’ve gotten an all-clear signal.”