U.S. stocks sink after Fed chief signals economic pain ahead

U.S. markets tumbled Wednesday after the Federal Reserve chairman flashed a big caution light informing Wall Street that the road to economic recovery from the coronavirus pandemic would be prolonged and bumpy.

The Dow Jones industrial average dropped nearly 517 points on the day, or 2.2%, closing at 23,247.97. Stocks went south after Fed Chair Jerome Powell said a painful recession could be in store if policymakers do not infuse more cash into the economy and as investors digested a blizzard of news on uneven state reopenings, mounting coronavirus infections and mixed scientific updates on treatments.

“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” Powell said Wednesday morning in a videoconference with the Peterson Institute for International Economics.

The Standard & Poor’s 500 index fell 50 points, or nearly 1.8%, to settle at 2,820,00. The tech-centric Nasdaq composite slid 139 points, or 1.6%, to finish at 8.863.17.

“Markets seem to be selling on the prospects of a difficult reopening to the economy,” said Jamie Cox of the Richmond-based Harris Financial Group. “Negotiations over a phase four stimulus are getting more contentious, and this is hurting too. I do not think stocks are overvalued, but the market is saying otherwise.”

Stocks had been riding high as recently as last week, with the tech-heavy Nasdaq crawling into positive territory for the year on the backs of a handful of tech giants including Apple, Amazon, Google-parent Alphabet, Facebook and Microsoft. (Washington Post owner Jeff Bezos is founder and chief executive of Amazon.)

But several analysts said in recent days that stocks were moving too fast, too soon, and acting like a 2021 recovery was already underway.

“Even with today’s decline, stocks are trading significantly higher than the March 23 lows,” said Howard Silverblatt. “Corporate earnings are currently trading as if we are in the second half of the year and seeing a recovery.”

On Tuesday, House Democrats proposed a $3 trillion coronavirus rescue package that would provide relief for state governments plus another round of stimulus checks. Republicans quickly rejected the bill.

Powell said the United States probably will face an “extended period” of weakness. Stocks fell sharply after he spoke, and by midafternoon the Dow Jones industrial average had shed 618 points, or 2.6%. The broader Standard & Poor’s 500 and tech-centric Nasdaq composite indexes were down 2.4%.

Powell also used the video appearance to reiterate the central bank’s stance on negative interest rates: still no, despite President Donald Trump’s repeated push on the issue. The Fed has dropped the benchmark interest rate to zero to shore up the economy against the coronavirus pandemic.

“The committee’s view on negative rates has not changed,” Powell said. “This is not something we are looking at.”