The Dow Jones rallied on Thursday, although a sudden decline in the oil price knocked the stock market well off its highs as OPEC negotiated potential supply cuts.
Adding fuel to the rally was the announcement that the Federal Reserve will dive into high-yield debt markets to support the flailing economy.
Next week sees a barrage of earnings reports from Dow 30 stocks in what’s shaping up to be a massive test for the stock market recovery.
The three major U.S. stock market indices all clung to gains heading into the close, although each had retraced far from its session high:
The stock market’s intraday pullback accompanied a collapse in the price of oil. Crude fell 6% toward $23.50 per barrel after Mohammad Sanusi Barkindo, OPEC’s Secretary-General, called oil’s fundamentals “horrifying” and “beyond anything we have ever seen.”
OPEC is hashing out the terms for a production cut to arrest this “horrifying” supply cut, but not all of the member nations are on the same page. At present, Mexico appears to be holding up the deal.
Meanwhile, the U.S. economy recorded another astonishingly bad week for initial jobless claims, with 6 million more Americans out of work. This dovetailed with a substantial plunge in consumer sentiment.
The Dow Jones rally weathered these brutal data thanks to a surprise announcement from the Federal Reserve, which plans to up the ante in its dramatic effort to prevent a financial market collapse.
Laying out his plans to further bolster local and state economies, Fed Chair Jerome Powell said:
Our emergency measures are reserved for truly rare circumstances, such as those we face today. When the economy is well on its way back to recovery, and private markets and institutions are once again able to perform… we will put these emergency tools away.
Included in this box of emergency tools is a highly controversial move into risky high-yield debt. Previously viewed as untouchable, this pivot sparked a strong reaction among investors and economists who see it as a violation of the Federal Reserve’s charter.
This begs a sobering question. If the Powell-led Fed is making interventions like this with the Dow Jones on the rise, how bad is the data that the FOMC is reviewing?
If ING Chief International Economist James Knightley is correct, it’s thoroughly awful.
In a report on the Federal Reserve’s intervention, Knightley makes the case that lost output will not be recouped until 2022. Perhaps most worrying is the fact that it seems unlikely that all of these tens of millions of lost jobs will be recovered anytime soon.
Our base case is that we start to see a rolling process of re-opening in the US from mid-May, but one that still involves some form of social distancing with stricter testing coming into place.
This means job opportunities for the millions of workers laid-off, particularly in the leisure & hospitality, retail and transport sectors will remain somewhat limited, and unemployment will be slow to fall.
Given how visible the negative impact of the coronavirus has been on the real economy, the sharp rally in the stock market has a number of investors scratching their heads.
It would seem that Wall Street is fixated on the short-term improvement in the pandemic outlook. The White House has downgraded its estimate for U.S. COVID-19 deaths, and New York is eyeing a slowdown in hospitalizations.
As the Dow 30 rumbled to a steady gain on Thursday, Boeing was once again among the index’s most volatile components. The aerospace stock bounced 3.6% to recover past $150.
Looking ahead to next week, Dow members JPMorgan Chase, Johnson & Johnson, Goldman Sachs, and United Healthcare will all be posting earnings.
United Healthcare (-1.8%) and J&J (-2%) both slipped into the red on Thursday, while Goldman Sachs and JPMorgan Chase reveled in the aftermath of the Fed’s decision. They rose 3.5% and 8.4%, respectively.