By Karen Langley
The Dow Jones Industrial Average dropped more than 500 points Wednesday after Federal Reserve Chairman Jerome Powell said further stimulus could be needed to support the economy's recovery from the coronavirus-induced contraction.
Major indexes opened modestly lower, and the declines accelerated as the session progressed. The blue-chip index dropped nearly 700 points at its low. The declines were broad, with 29 of the 30 stocks in the index in the red, along with all 11 sectors of the S&P 500.
Shares of beaten-down energy, airline and bank stocks were among the biggest decliners. Halliburton fell 9.1%, United Airlines Holdings dropped 9% and Wells Fargo lost 6.3%. Shares of all three companies have lost more than half their value since the end of last year.
Investors have been eagerly seeking any clues about the potential length and severity of the economic downturn. In an online speech Wednesday morning, Mr. Powell revealed growing alarm about the path ahead, describing the outlook as "highly uncertain and subject to significant downside risks."
"There is a growing sense that the recovery may come more slowly than we would like...and that may mean that it's necessary for us to do more," he said, while urging the White House and Congress to spend more money to ensure the economy's rebound.
The cautionary tone helped send the Dow industrials down 516.81 points, or 2.2%, to 23247.97, with the blue chips notching their first three-day losing streak since early March. The S&P 500 dropped 50.12 points, or 1.7% to 2820.00. The technology-heavy Nasdaq Composite slipped 139.38 points, or 1.5%, to 8863.17, pulling the index back into the red for the year.
"Today the idea that we'd have a V-shaped recovery is on the wane," said Sara Walker, senior strategist at BMO Private Bank. "The thought is this will take a longer time, so the more cyclical companies, like industrials, are going to be struggling for a longer period of time than expected."
Economists surveyed by The Wall Street Journal expect gross domestic product to shrink 6.6% this year, measured from the fourth quarter of 2019. That reflects a deeper slowdown than the 4.9% contraction predicted in last month's survey.
Evidence is growing of the damage already sustained by businesses. A gauge of U.S. business prices posted its largest decrease on record in April as the pandemic curtailed economic activity.
House Democrats earlier this week released a roughly $3 trillion bill to battle the health and economic effects of the coronavirus pandemic, a sum that would about double what Congress has allocated so far. But Republicans have argued for waiting to see how the economy responds to the measures already in place.
Despite warning of a potential wave of bankruptcies and slow improvement in the job market, Mr. Powell said in Wednesday's speech that the central bank wasn't considering plans to cut its benchmark federal-funds rate below zero. Futures markets have implied investors see rising prospects of negative interest rates next year, even though the tool has had limited success in Europe and Japan.
The yield on the U.S. 10-year Treasury note edged down to 0.648% from 0.679% on Tuesday as bond prices rose and investors flocked into haven assets.
Much of the recent rebound in the stock market has been spurred by strong investor demand for shares of big tech companies. The S&P 500 has cut its decline for the year to 13%, buoyed by a 28% jump in Amazon and a 14% increase in Microsoft. Some investors say the outperformance of megacap stocks is masking weakness in the broader stock market.
"I think there is a little bit of a nervousness in this market due to thin leadership and the potential that the stay-at-home orders and thus a low-consumption economy will last longer than anyone had expected," said Yousef Abbasi, global market strategist at INTL FCStone. "If it lasts longer than anyone had expected, then you could argue that the recovery becomes that much more arduous."
As the economic outlook darkened, the economically sensitive energy, financial and industrial sectors were among the weakest performers in the S&P 500 on Wednesday. Energy stocks fell 4.4%, while financial shares dropped 3% and industrials lost 2.6%.
Prominent investors have suggested in recent days that stock prices have climbed higher than is justified. Hedge-fund manager David Tepper told CNBC Wednesday that the market was "maybe the second-most overvalued I've ever seen" after the tech bubble. And Stanley Druckenmiller told the Economic Club of New York on Tuesday that "the risk-reward for equity is maybe as bad as I've seen it in my career," according to a Twitter post from the organization.
In recent days, the S&P 500 was trading at 21.14 times projections for earnings over the next 12 months, the highest level since March 2002, according to Dow Jones Market Data. But investors have questioned the reliability of forecasts for profits in the coming quarters, given the uncertainty about the course of the pandemic and economic recovery.
In Europe, the benchmark Stoxx Europe 600 fell 1.9%. Benchmarks in Asia ended the day mixed.
Write to Karen Langley at firstname.lastname@example.org