By Stan Choe and Alex Veiga
The S&P 500 index closed out its best week since 1974 with another gain Thursday after the Federal Reserve launched its latest unprecedented effort to support the economy through the coronavirus outbreak. The central bank’s announcement of programs to provide up to $2.3 trillion in loans to households, local governments and businesses overshadowed a report that another 6.6 million people applied for unemployment benefits last week. The Fed’s actions, as well as efforts by Congress, are aimed at alleviating the tremendous strains on the economy caused by the widespread business shutdowns and travel restrictions put in place to stem the spread of the virus.
THIS IS A BREAKING NEWS UPDATE. AP’s earlier story is below:
A rally on Wall Street Thursday is fading, the second time this week that a big early gain threatened to give out in the afternoon.
The S&P 500 is up 1.1% with an hour to go in trading after earlier being up as much as 2.5%. The bigger early gains came after the Federal Reserve launched its latest unprecedented effort to support the economy through the coronavirus outbreak.
The central bank announced programs to provide up to $2.3 trillion in loans to households, local governments and small and large businesses as the country tips into what economists say may be the worst recession in decades. It’s the latest massive move by the Fed, which has rushed to ensure cash gets to parts of the economy that need it after markets got snarled by a rush of investors pulling cash out of the system.
The stock market is not the economy, and that distinction has become even more clear this week. The S&P 500 is on track to rise more than 11% this week, even though the government announced Thursday that 6.6 million Americans applied for unemployment benefits last week as layoffs sweep the nation. That would be the best week for the index since November 2008.
That’s because stock investors are continuously looking ahead a few months or more to the future. From mid-February through late March, they sent stocks down by a third on expectations that a steep recession was imminent, before the economy really began to crunch.
In the last few weeks, though, investors have sent the market back up more than 20% following the massive aid promised by the Fed, other central banks and governments around the world, even as evidence piles up that the recession fears were prescient. This week, some investors have also begun to look ahead to the possibility that the economy could reopen amid signs the outbreak may be peaking or plateauing in several of the world’s hardest-hit areas.
”The market is solely focused on the number of cases,” said Quincy Krosby, chief market strategist at Prudential Financial. “The question is when can the restrictions be lifted? That’s what the market is focused on, when does America open up for business again?”
The Dow Jones Industrial Average was up 265 points, or 1.1%, at 23,705, as of 3:14 p.m. Eastern time. It had been up as many as 575 points earlier, but the gains faded after the price of oil took another abrupt turn lower. That’s been a trend this week.
The Nasdaq composite was virtually flat.
Many professional investors have been skeptical of the rally, saying there is still too much uncertainty. They say predictions for a relatively quick economic rebound following a steep recession are overly optimistic. While hopes are building that a plateau may be arriving for infections in several hotspots, it's not assured. In the meantime, businesses continue to shut down and one in 10 U.S. workers has lost their jobs in the last three weeks.
”You typically have very strong rebounds, even in a bear market,” Krosby said of markets where stocks have fallen more than 20%. “The question is whether or not we see selling into this rebound, or can we continue to build on it.”
The market's big gains this week have been somewhat tentative. On Tuesday, the S&P 500 charged to an early 3.5% gain before it disappeared in the final minutes of trading. On Thursday, the index bounced between a gain of as much as 2.5% and a more modest 0.5% gain.
The end of the week is also looming, with the stock market closed on Friday for a holiday. Stocks have routinely sold off on the last day of the week recently, as some investors look to get out of the market before more bad news could pile up over the weekend.
The Fed's immense programs announced Thursday touch far-reaching corners of lending markets, and if they continue for the long term, they could encourage investors to take on too much risk and lead to market bubbles.
But in the short term, “what the Fed is doing is great and helping markets function and providing liquidity so investors can do what they need (and) want to do,” said Warren Pierson, deputy chief investment officer at Baird Advisors.
The programs even include bonds for companies that have weak enough credit ratings to be called “junk," or speculative grade.
Worries have been high about the ballooning amount of corporate debt that's concentrated at the bottom edge of high-quality “investment grade." The looming recession could push a lot of that into “junk” status, which would force many investors to sell it because they're required to hold only investment-grade bonds. A run from such bonds could trigger sell-offs in other areas of the market and lead to even more pain across the economy.
The Fed's new programs include some support for bonds that were at the bottom edge of investment grade, as of March 22, but subsequently downgraded to the top tier of junk. Exchange-traded funds tracking the junk bond market were up nearly 6%.
Also in the Fed’s programs are municipal bonds, which allow cities and state governments to raise cash. On a normal day, trading in the market might see 15 buyers make a bid for a particular bond. But as recently as a few weeks ago, there were 15 sellers for every buyer, according to Gabe Diederich, portfolio manager at Wells Fargo Asset Management. All the difficulty in selling caused prices to tumble more than they otherwise should, even for high-quality bonds. That makes it more difficult for local governments to borrow.
Stock markets around the world also rose. German's DAX returned 2.2%, France's CAC 40 added 1.4% and the FTSE 100 rose 2.9%. Japan's Nikkei 225 was virtually flat, while South Korea's Kospi rose 1.6% and the Hang Seng in Hong Kong climbed 1.4%.
The U.S. stock market’s fade coincided with another sharp slide for oil. Benchmark U.S. crude oil fell $2.33, or 9.3%, to settle at $22.76. It had been above $28 earlier on the day on speculation that Russia, Saudi Arabia and other big producers may announce a sharp cutback in production following their meeting Thursday. Demand for energy has withered as economies shut down to slow the spread of the virus, and the world is awash in oil.
Brent crude fell $1.36, or 4.1%, to $31.48 a barrel.