Wall Street plunges amid fear of economic fallout, COVID-19 spikes

An alarmist red engulfed trading screens on Wall Street, as the Dow Jones Industrial Average plunged Thursday in the biggest drop since March.

The Dow fell 1,861.82 points or 6.9% to close at 25,128.17 points. 

The sell-off leaves investors wondering whether we’re likely to give back many of the gains we’ve seen since the height of the coronavirus panic in late March. Are we heading back to the days when we dreaded looking at statements for our 401(k)s?

On the one hand, some analysts maintain that the mood of the past few weeks on Wall Street had rapidly swung from thoughts of an all-out economic collapse to an amazing level of euphoria in less than three months. 

Now, we're swinging back toward a bit more gloom. Even so, some pullback seemed likely in the cards.

"The stock market has experienced an incredible rebound off the March 23 low," said David Kudla, CEO of Mainstay Capital Management. 

"Two months ago, no one would have believed stocks would have even been anywhere near these levels. To pull back 7% to 10% is nothing relative to the advance of the past 10 weeks, and should be expected anyway," Kudla said.

On Monday, the Dow had closed at 27,572.44 points, which represented a gain of 8,980.51 points or 48% since tumbling to 18,591.93 points on March 23 during the height of COVID-19 panic. 

The coronavirus-related market meltdown had shocked investors considering that just weeks before the Dow had closed at a record 29,551.42 points on Feb. 12. 

So we had been doing fairly well until much of this week. 

Kudla said he does not see a reason to believe that all the gains made will be lost in the weeks ahead. 

"As long as the Federal Reserve is providing stimulus, and it still is doing so, stocks have fuel to resume their rally," Kudla said. 

We may be looking at a time, though, where we will see more risk ahead for both the economy and the threats of COVID-19 in the United States. 

Spikes in coronavirus cases are being reported in Arizona and other states, including South Carolina, Florida, Alaska, Arkansas, California, Kentucky and Texas. 

Steven Mnuchin, Treasury secretary, told CNBC on Thursday that shutting down the U.S. economy again isn't an option. 

“We can’t shut down the economy again. I think we’ve learned that if you shut down the economy, you’re going to create more damage,” Mnuchin said in an interview with CNBC’s Jim Cramer on “Squawk on the Street.” 

Even so, we can't force consumers to reopen their wallets.

Many fear that consumers won't eagerly go back into shopping malls, restaurants or even auto dealerships if they're continuing to see hot spots where COVID-19 cases are multiplying. 

If the consumer holds back, you can say goodbye to any expectations for a quick rebound in the U.S. economy and more people pocketing more paychecks.

On Thursday, General Motors closed at $34.21 a share, down $2.09 or 5.76%. Ford Motor closed at $6.13 a share, down 68 cents or 9.99%.

La-Z-Boy closed at $26.87 a share, down $1.53 or 5.39%. 

Sam Huszczo, a Southfield-based chartered financial analyst, said Thursday's plunge was "just another example of how disconnected the stock market is from the economy."

"At one point last week," Huszczo said, "we marked the fastest 50-day rally ever in the history of the stock market, while at the same time officially entering into an economic recession for 2020 with historically high unemployment rates."

On Monday, the National Bureau of Economic Research — which is the official source for declaring the beginning and the end of economic cycles in the United States — gave word that the U.S. economy peaked and fell into a recession in February.

On Wednesday, the Federal Reserve indicated that short-term interest rates are likely to remain near 0% until at least 2022. 

"Politics, pandemics, protests along with corporate credit downgrades and more white-collar layoffs could be the stronger driving force heading into the back half of 2020," Huszczo said. 

The pandemic may not fade in the summer as some might have hoped.

In addition, economists and others say another round of stimulus out of Washington may be needed, particularly to help state and local governments deal with budget shortfalls. 

The rapid rise for stock prices seemed to be banking on a V-shaped rebound for the economy — a steady climb as the U.S. economy reopens after the massive shutdown that took place to stem the spread of the coronavirus.

"The current levels of the stock market have begun to discount a V-shaped recovery," said Matt Dmytryszyn, director of investments with Southfield-based Telemus Capital.

"While we hope that economic conditions have bottomed and we are seeing signs of gradual economic improvement, it remains uncertain what the ultimate path of recovery will be," Dmytryszyn said.

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Robert Dye, chief economist for Comerica, noted that prior to Thursday’s sell-off, “stock prices were running high by most measures and were ripe for a downward adjustment." 

And cautionary comments by Federal Reserve Chairman Jerome Powell on Wednesday only fueled some talk that it may be premature to discount the economic risks ahead.

Dye said Powell’s comments were a “frank reminder that we still face a good deal of economic and financial market risk in the second half of this year, even though economic data has recently been improving.”

"There is always a risk that the stock market could test new lows, but I do not expect that to happen in the near term," Dye said. 

ContactSusan Tompor: stompor@freepress.com. Follow her on Twitter@tompor. Read more on business and sign up for our business newsletter.