Dow Jones Teeters as Fed Insider Admits Recession Is Unavoidable

Former Federal Reserve advisor says a recession is unavoidable as New York and San Francisco go into effective lockdown.
Posted in: Markets
Published:
March 17, 2020 11:52 AM UTC
  • The Dow Jones Industrial Average (DJIA) teetered as a wild futures session gave way to a nervous stock market open.
  • One former Federal Reserve advisor said there’s little chance of avoiding a recession.
  • Millions of jobs will be lost in the U.S. as major cities go into lockdown over the coronavirus.

The U.S. stock market traded nervously on Tuesday as the Dow Jones Industrial Average (DJIA) attempted to recover from its worst single-day crash since 1987.

Stock futures had slammed into the “limit up” circuit breaker overnight, but equities relinquished most of their gains this morning.

Traders are increasingly pricing in the chance of a full recession and even a longer-term depression. Former advisor to the Federal Reserve board, Andrew Levin, said a slowdown is inevitable.

I don’t see how we’re going to avoid having a recession.

New York and San Francisco, the economic centers of America, both went into effective lockdown on Monday as President Trump urged citizens to stay at home.

Dow fails to recover from Monday crash

The Dow bounced slightly when the stock market opened before grinding lower. | Source: Yahoo Finance

Dow Jones futures jumped as much as 5% overnight, triggering the upper circuit breakers. The attempted relief rally was short-lived and those gains evaporated when the stock market opened.

By 9:45 am ET, the Dow had not only shed all its gains but also fallen 125.99 points or 0.62% into the red. The DJIA last traded at 20,062.53.

The S&P 500 clung to gains of 1.19%, while the Nasdaq rose 1.01%.

Recession is inevitable

The global economy is slowly grinding to a halt as the coronavirus forces entire countries to shut down. The first layoffs in the U.S. have already begun as shops, bars, and restaurants close up. Nelson Loh at Novena Global Lifecare said he expects it to get worse.

Unfortunately job cuts will happen. I think most of us have that expectation… Given the spillover into Europe and the US, this has become a global problem, not an Asia problem.

If this crisis descends into a full recession, we could see as many as 3.5 million jobs lost in the U.S. alone. Fed advisor Andrew Levin explains further:

The problem for the U.S. economy is a lot of cities are shutting down, and people staying home, not going out to restaurants, not going out shopping, not buying cars.

Dow Jones hasn’t priced in a depression yet

The vicious stock market selloff may just be the beginning, according to some Wall Street analysts. Traders have so far priced in a recession, but not a longer-term slump, or depression.

Wall Street witnessed the worst day in over 30 years and there’s more woe coming. | Source: AP Photo/Mark Lennihan

Frances Donald, global chief economist at Manulife Investment Management explains:

This market looks like it has already priced in most of a garden variety recession. It is now on top of that having to price in some probability of a credit crisis … A 2008-like financial contagion is not yet priced into this market.

She said only a slowdown in coronavirus cases or a sense of calm in the credit markets would end the rout. Even then, it will take time to reveal the true effect of the virus on the U.S. economy. Chinese numbers are only just coming through, and it’s not good.

Can we avoid the worst-case scenario?

If a recession is inevitable, how do we stop it evolving into something much worse? Analysts say that only government fiscal action will help, after Federal Reserve monetary action fell flat.

The White House is looking to issue an $800 billion stimulus package this week. The fiscal injection is expected to support businesses as the country goes into lockdown.

Half is expected to go to small businesses and workers while the other half may be used to fund a payroll tax break until the end of the year. Director of the National Economic Council Larry Kudlow also said the government would support airlines if required.

This article was edited by Samburaj Das for CCN.com. If you see a breach of our Code of Ethics or Rights and Duties of the Editor, or find a factual, spelling, or grammar error, please contact us and we will look at it as soon as possible.

Last modified: March 17, 2020 1:47 PM UTC

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Ben Brown @_ben_brown

Ben is a journalist with a decade of experience covering financial markets. Based in London, UK, his writing has appeared in The Huffington Post and he was Chief Editor at Block Explorer, the world's longest-running source of Blockchain data. Reach him at benjamin-brown.uk or on Twitter at _Ben_Brown. Email ben @ benjamin-brown.uk.