Markets Plunge on Gloomy Fed Predictions, Fear of Second Wave of Infections

By:
Chris Gaetano
Published Date:
Jun 11, 2020
The unflappable optimism that has driven the recent rally seems to have popped, at least today, as all major indices today are seeing major crashes of a size not seen since the initial panic in March.

As of 1:34 p.m., the Dow Jones Industrial Average was down 1,447 points, the S&P 500 was down 145 points and the Nasdaq was down 373 points, representing a generalized wailing and gnashing of the teeth throughout Wall Street.

MarketWatch attributed the move to the Federal Reserve predicting that gross domestic product (GDP) will contract by 6.5 percent by the end of the year, on a year-over-year basis, and that unemployment will reach 9.3 percent. Traders also seem to be driven by fresh fears of a second virus wave just as parts of the economy begin to reopen, rattled by news of fresh spikes in Florida, Texas and Arizona.

They did not seem to be mollified by assurances by Treasury Secretary Steven Mnuchin that, even in the event of a second wave, he does not anticipate the economy shutting down again. Further, traders broke their typical pattern of being encouraged by news that fewer people are applying for unemployment than in previous weeks, despite this week's figure of 1.5 million continuing the trend of smaller and smaller (but still gigantic by historical standards) numbers losing their jobs.

Numerous analyses have shown that a second wave of infections would be a disaster for the global economy. Most recently, the Organisation for Economic Cooperation and Development (OECD) warned that, with a second wave, world GDP will drop by 7.6 percent and unemployment worldwide would rise to 10 percent. Absent a second wave, world GDP was estimated to drop by 6 percent and world unemployment to rise to 9.2 percent. It noted that a second wave will also have an outsized effect on 2021, as Q3 2021 will have a world GDP about two points lower in such an event.

The World Bank's recent report warned that, in the event of a second wave of infections, "domestic investment would grind to a halt amid extreme uncertainty, and development outcomes would worsen appreciably" as "firms would be hampered by a chronic lack of demand, by a growing shortage of inputs, and by the need to provide more space and virus safety precautions for employees." In such a case, it says fiscal stimulus measures might not be as effective as they were before, as some sectors will be completely shut down.

So far, over 115,000 people in the United States alone have died from COVID-19. Worldwide, there have been over 408,000 deaths.

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