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U.S. stocks sink, with Dow falling more than 500 points, after Fed chief signals economic pain ahead

Federal Reserve Chair Jerome H. Powell says policymakers need to come up with more fiscal support

Federal Reserve Chair Jerome H. Powell Said Wednesday the United States is likely to face an “extended period” of weakness. (Eric Baradat/AFP/Getty Images)

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 517 points, or 2.2 percent, to close at 23,247.97 and mark its third consecutive day in the red. The Dow has shed more than 1,000 points in the past three days.

Stocks went south Wednesday after Fed Chair Jerome H. Powell said that a painful recession could be in store if policymakers do not infuse loads more cash into the economy and as investors face a blizzard of news around 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 in a video conference with the Peterson Institute for International Economics.

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

“Markets seem to be selling on the prospects of a difficult reopening to the economy,” said James A. Cox of the Richmond-based Harris Financial Group. “Negotiations over a Phase 4 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. (Amazon founder and CEO Jeff Bezos owns The Washington Post.) The Nasdaq declined for its second day in a row Wednesday and is back in the red for 2020.

The Trump administration and Congress have already begun pumping more than $3 trillion worth of stimulus into the economy to counter the economic ill effects of the pandemic, including help for businesses and direct payments to individuals.

Investors have credited the Federal Reserve with saving the markets from collapse and averting an even worse financial crisis. The central bank in March moved to buy massive quantities of government, corporate and municipal bonds, and it is launching a program to lend directly to Main Street businesses.

Several analysts said in recent days that stocks had moved too far, too fast and have been acting like a 2021 recovery was already underway. Some said the market was pricing in the good news without factoring in the challenging months ahead, littered with the potential for severe virus outbreaks or even a fall relapse, and difficulties in U.S.-China relations.

“All of the good and optimistic outlook is basically priced into the market today,” Goldman Sachs chief U.S. equity strategist David Kostin said Tuesday in a CNBC interview.

“The risk of activity and developments going forward, as I think about it, is probably more skewed to the downside in the near term than the upside,” he said. “It’s certainly not giving a lot of cushion for portfolio managers."

Noted hedge fund manager Stanley Druckenmiller said in a webcast with the Economic Club of New York that the likelihood of a V-shaped recovery “is a fantasy,” according to Bloomberg News.

The former George Soros associate, who now runs Duquesne Family Office, said the risk-reward calculation for equities is the worst he’s seen.

Wednesday’s declines were broad and deep. All 11 stock market sectors finished in the red, led by energy and financials, down 4.4 and 3 percent, respectively. American Express was the biggest drag on the Dow, losing more than 6 percent on the day. Chevron fell 2.6 percent, and ExxonMobil plunged 5 percent as energy companies struggle against weak oil prices.

Technology, which has been largely responsible for the market gains of recent years, did not come to the rescue. Amazon was the only big tech stock to go positive, squeaking ahead 0.5 percent.

“Even with today’s decline, stocks are trading significantly higher than the March 23 lows,” said Howard Silverblatt of S&P Dow Jones Indices. “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 legislation.

Fed Chair Powell warns of long, painful downturn if Congress does not provide more economic relief

Powell also used the video appearance to reiterate the central bank’s stance on negative interest rates — still no, despite President Trump’s repeated push on the issue. The Fed has already 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."

European markets tipped negative Wednesday as Britain reported that its economy contracted 5.8 percent in March. The FTSE 100 fell 1.5 percent on the day, and Germany’s DAX fell 2.6 percent. The Pan-European Stoxx 600 lost nearly 2 percent. In Asia, Japan’s Nikkei 225 dipped 0.5 percent, and Hong Kong’s Hang Seng fell 0.3 percent.

Coronavirus: What you need to know

Where do things stand? See the latest covid numbers in the U.S. and across the world. In the U.S., pandemic trends have shifted and now White people are more likely to die from covid than Black people.

The state of public health: Conservative and libertarian forces have defanged much of the nation’s public health system through legislation and litigation as the world staggers into the fourth year of covid.

Grief and the pandemic: A Washington Post reporter covered the coronavirus — and then endured the death of her mother from covid-19. She offers a window into grief and resilience.

Would we shut down again? What will the United States do the next time a deadly virus comes knocking on the door?

Vaccines: The CDC recommends that everyone age 5 and older get an updated covid booster shot. New federal data shows adults who received the updated shots cut their risk of being hospitalized with covid-19 by 50 percent. Here’s guidance on when you should get the omicron booster and how vaccine efficacy could be affected by your prior infections.

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