The Dow Jones Industrial Average (DJIA) fell for a second consecutive day on Friday after one of its “safety stocks” warned that the coronavirus outbreak had put a dent in its earnings guidance.
St. Louis Federal Reserve President James Bullard appeared on CNBC to calm investor fears about the disease, which he claims will “blow over” after a “temporary shock.”
There’s a high probability that the coronavirus will blow over as other viruses have, be a temporary shock and everything will come back.
But investors aren’t so sure. They expect the Fed to cut interest rates to support the stock market, something the central bank appears reluctant to do.
The stock market suffered an unexpected bout of volatility on Thursday. The Dow fell more than 400 points from its daily high before a recovery slashed those losses to just 128 points.
The Dow whipsawed back into decline on Friday, dropping 122.54 points or 0.42% to 29,097.44.
The S&P 500 fell 0.44% to 3,358.55.
The Nasdaq slid 0.41% to 9,710.60 to round out a moderately-bearish day on Wall Street.
The Fed’s Bullard remains upbeat about how the U.S. economy and stock market will weather the coronavirus outbreak. And like Vice Chair Richard Clarida, he doesn’t think an interest rate cut is necessary.
Bullard told CNBC:
If you think that this virus is going to dissipate and we’re going to have temporary shocks and then everything’s going to go back to normal, then I think the Fed’s in great shape and we don’t have to lower rates in that scenario.
A lot of the news on the U.S. economy has been good in the last couple of months. I’ve been arguing we’re in good shape for a soft landing in the U.S. economy.
He acknowledged that there’s a “low probability that this could get much worse,” but an increasing number of analysts foresee “much worse” as a base-case scenario for the Dow.
There are currently 76,776 confirmed cases and 2,258 deaths, including nearly 75,500 infections in mainland China. But investors appear more concerned about the spread of the virus outside China’s borders.
South Korea’s infection toll surpassed 200 overnight, and Japan’s is on the verge of crossing into triple digits.
South Korea’s outbreak originated in Daegu at a cult church with apparent ties to Wuhan, China. Hundreds of more church members are exhibiting coronavirus symptoms.
Damage from the coronavirus has already forced multiple Dow Jones components to cut their earnings guidance.
Defensive stock Coca-Cola said today that it expects coronavirus to have a 1-to-2 penny impact on its first-quarter earnings, although it currently expects to meet its full-year target.
Apple, the Dow’s second most heavily weighted component, rattled Wall Street earlier in the week when it advised investors that it would not meet its fiscal second-quarter guidance.
Both Apple and Coca-Cola have significant exposure to China, but Goldman Sachs doesn’t believe they’ll be the only ones to take an earnings hit from the coronavirus outbreak. The investment bank told clients that the stock market has failed to price in how severely the virus will bleed profits.
Goldman says that means investors should brace for an impending correction. Cumberland Advisors disagrees.
Writing in market commentary this week, Cumberland Chairman and CIO David R. Kotok predicted that coronavirus would take a bite out of corporate earnings. But he expects that investors will stomach another hike in price-to-earnings (PE) ratios, which are already at unusually-high levels.
Why? Because no matter what Bullard and Clarida say now, Cumberland anticipates a “massive…liquidity response” from central banks around the world.
And liquidity, he says, will inflate stock markets – and PE multiples.
So, we’re leaning to full investment in our portfolios. We don’t like a natural disaster that is sickening many and killing folks every day. We think the spread of the virus will continue. We’ve seen credible estimates as high as an eventual 4-5 million cases and a baseline 2% to 4% fatalities rate worldwide.
But the investment outlook now is for a massive central bank liquidity response, and that means higher multiples for stock markets around the world.
According to futures market data, traders expect that the Fed could execute another interest rate cut as early as June. The probability increases to about 67% following the bank’s July meeting.
But as Fed Chair Jerome Powell warned earlier this month, that could leave policymakers out of options to fight the next recession, whenever it does arrive.
Last modified: June 24, 2020 1:04 AM UTC