The Dow Jones surged mid-week as Federal Reserve Chair Jerome Powell pledged substantial and long-lasting support for the U.S. economy.
The stock market shrugged off a miserable first-quarter GDP reading as the Dow Jones Industrial Average (DJIA) surged toward a gain of more than 600 points on Wednesday.
One major late-session catalyst came from Federal Reserve Chair Jerome Powell’s admission that the U.S. central bank has been giving markets “substantial” support.
Additional fuel came from optimism about Gilead Sciences’ remdesivir drug, which earned a major vote of confidence from Dr. Anthony Fauci.
All three of the major U.S. stock market indices enjoyed substantial rallies on Wednesday:
The Federal Reserve came in on target, holding interest rates at zero while ramping up the doom-and-gloom with a very dovish accompanying statement.
Based on the central bank’s concern about the economic damage of COVID-19, it looks likely that Fed stimulus will remain in place for a very long time.
Even more interesting was Jerome Powell’s stunning admission that the Fed’s response to the crisis had supported markets “substantially” in the last few weeks. This controversial statement adds force to the argument that the Fed has been the driving force in the Dow’s recovery.
First-quarter U.S. GDP came in at negative 4.8%, which was considerably worse than expected and formally ended the longest economic expansion on record.
Despite the bad news, it seems that the stock market was fully priced for this outcome. Investors quickly shrugged off the devastating reading.
ING economist James Knightley echoed the warnings from the Federal Reserve. He anticipates the economic damage will linger as far as 2022, stating,
Unfortunately, we doubt that the U.S. will experience a V-shaped recovery. The legacy of the crisis and the potential for long term structural changes mean at best we currently think the lost output in 1Q and 2Q won’t be fully regained until late 2022.
This is all quite gloomy, but with the Federal Reserve and the government continuing to offer support and with Covid-19 containment measures likely to ease further in the second half of the year – particularly if work on a vaccine makes substantial progress – the news flow for the economy should be much improved for 3Q and 4Q.
Wednesday also brought some vindication to speculation that the rally in the Dow Jones and S&P 500 has been driven primarily by development in the medical fight against the coronavirus.
Gilead Sciences revealed that remdesivir had performed well as a COVID-19 treatment in a recent U.S. trial. White House coronavirus task force member Dr. Anthony Fauci praised the successful trial, which triggered an additional leg higher in the Dow prior to the Federal Reserve’s decision on interest rates.
Another boost came from ongoing efforts to roll back coronavirus lockdowns in multiple U.S. states.
Bulls continue to cheer the economy’s emergence from deep freeze, but it’s still uncertain what the country will look like when the quarantines end. The biggest question is when we’ll see the resurrection of plunging consumer demand.
Broad strength was seen throughout the Dow 30 as Jerome Powell pledged the maximum support of the Federal Reserve.
In line with signs of rising activity, U.S. gasoline inventories contracted unexpectedly, while crude oil stockpiles rose slightly less than forecast. This is good news for the energy giants, and both Chevron and Exxon Mobil rallied more than 5.5% as WTI futures surged 24% to $15 per barrel.
Boeing popped 6% after its mixed earnings report managed a beat in Q1, in what could be the first good news shareholders have seen for months.
Walmart took a 2.9% hit because risk-on reigned supreme, and it was comfortably the weakest performer in the DJIA.
One of the Dow Jones’ most heavily weighted stocks is Apple, which will report earnings on Thursday. Expect a large amount of scrutiny to be applied to its China sales when the results come in. AAPL shares rose a moderate 3.7% on the day.
Last modified: September 23, 2020 1:54 PM