Markets end the week lower as investors assess the economic toll of the outbreak.
It was a week of downbeat pronouncements and grim economic data that had investors focus on the dire challenges facing the American economy.
Friday was no exception, and stocks were unsteady for most of the day, after new data showed how devastating the impact of the coronavirus pandemic had been to retail sales.
After a sharp fall early in the day, the S&P 500 rebounded, ending the day with a gain of less than 1 percent.
Still, thanks to back-to-back declines on Tuesday and Wednesday, the index had its sharpest weekly drop since late March, a retreat that stands out after a long stretch in which stock investors seemed willing to look past the deeply negative outlook for the economy and the uncertain path of the coronavirus outbreak.
On Tuesday, the nation’s top infectious disease expert, Dr. Anthony S. Fauci, warned lawmakers that an overly rapid reopening of large swathes of the American economy, which had been shuttered in an effort to control the outbreak, could reignite the outbreak. His comments drove a sell-off in the stock market, which closed down 2 percent.
“The one-two punch from Fauci/Powell is that the road ahead is likely to be rocky — perhaps rockier than market was hoping for,” William Delwich, an investment strategist at Baird, a financial firm based in Milwaukee, wrote in an email.
Amid it all, a parade of economic reports continued to show an economic downturn of breathtaking speed and scope.
Prices of other “safe” investments — such as Treasury bonds and gold — continue to be high, suggesting some investors continue to be unconvinced that the market rally is sustainable.
“Just like it did in January and early February, the stock market is ignoring the warning signals that are being sent out by the moves in the ‘flight to safety’ assets,” said Matt Maley, chief market strategist at Miller Tabak, a trading and asset management firm.
The Federal Reserve used its annual financial stability report to sound a warning bell on weaknesses that have the potential to worsen the fallout in stock markets — which could then spill back into the rest of the economy — as coronavirus lockdowns slow growth, spurring job losses and causing companies and consumers to miss rent and mortgage payments.
The financial system “amplified the shock” in March, the central bank said on Friday, as short-term funding markets in particular seized up. Some hedge funds were “severely affected” and “reportedly” contributed to market dislocations, according to the central bank’s report.
Businesses came into the crisis highly indebted, the Fed said. Banks started out well-capitalized, but lower interest rates and the potential for credit losses could hurt their profitability and ability to replenish that capital.
“Economic activity is contracting sharply, and the associated reduction in earnings and increase in credit needed to bridge the downturn will expand the debt burden and default risk of a highly leveraged business sector,” the report said.
Wall Street is hampering some small businesses seeking aid.
When Michael Sullivan borrowed $22 million from a specialist Wall Street lender in 2018 to buy and renovate two Florida hotels, he had no idea how costly that decision would prove to be.
He found out recently, once visitors stopped coming to his properties because of the pandemic, prompting him to seek help from the federal government’s new small business loan program. But first, he had to tussle with his lender, the credit fund Benefit Street Partners, just to win permission to get the government loan. The legal fight cost him thousands of dollars and a month in lost time.
The CARES Act, which created the government’s Paycheck Protection Program that Mr. Sullivan borrowed from, prohibits any loan money from being controlled by other lenders. At the same time, it does not outlaw lenders like Benefit Street from enforcing existing contracts with borrowers seeking government funds.
The $650 billion program has helped millions of small businesses, but its rollout was uneven and slowed by confusing rules. The program’s structure itself created other challenges. For businesses such as Mr. Sullivan’s, the program’s structure has required them to fight costly legal battles simply to get any funds at all.
April could prove to be the bottom. The March figures were helped in part by panic buying, and stores were generally open for the first half of the month. Most states have begun to lift barriers to commerce and movement, and many economists expect spending to rise in May as people venture out.
But any rebound is likely to be gradual. There is no guarantee that customers will return in numbers previously seen — and even if Americans feel comfortable going out to shop, they may not have as much money to spend, since millions have lost their jobs.
“It’s probably fair to say the worst is over in terms of a collapse, unless there are waves of new outbreaks,” said Jim O’Sullivan, chief U.S. macro strategist for TD Securities. “But how fast does it come back? The short answer is none of us really know.”
The downturn may have left lasting scars. J. Crew and Neiman Marcus have filed for bankruptcy protection, and other big retailers like J.C. Penney, which employs about 85,000 people, are expected to follow.
The retail collapse is both a result of the economic crisis and a major contributor to it. The nation’s second-largest private-sector employer, after health care, the retail industry cut 2.1 million jobs in April.
The Commerce Department’s report on retail sales for April showed staggering declines in individual sectors of the industry. Increased sales at grocery stores and from online retailers didn’t come close to offsetting the declines elsewhere.
Restaurants and bars have lost half their business over the past two months.
At furniture stores, sales are off by two-thirds.
Clothing stores have seen sales fall by 89 percent since February. That plunge shows how reliant many retailers have remained on physical outposts, even as the internet has upended the shopping landscape.
As the pandemic persists, Wall Street bankers, Uber drivers, academics, artists and many other adults have turned reluctantly into boomerang children, uprooting their independent lives and migrating home. Some had partners, children and pets in tow. More than a few wondered if they carried the virus, but risked moving in anyway.
There were people who fled dense cities for the bucolic suburban houses where they grew up and the promise of home-cooked meals and free laundry. Others ended up in downsized spaces designed for empty nesters or in apartments already shared with other family members, such as grandparents or school-age siblings.
Parents caught by the swell of layoffs, furloughs and canceled contracts found themselves feeding grown children who were in the same position. Mothers who had grown accustomed to freedom were expected to return to cooking and cleaning. Shorts, cat food, headphones and other items had to be purchased because the new residents had not packed enough to last through the extended lockdown; their abandoned apartments had to be cleared out when the leases began to expire.
“Some parents see this as a welcome surprise, but it can also add a lot of fiscal strain,” said Lindsey Piegza, chief economist at the investment bank Stifel. “You can’t assume that parents are necessarily in a better-off position than their adult children.”
But younger workers are “notoriously poor savers,” she said, and many were caught without rainy-day funds during a devastating economic storm. A multigenerational quarantine was often the only viable option, albeit a potentially dangerous one given the risk of the virus spreading in close quarters.
These figures, combined with a revision downward to the economic growth tally for the end of 2019, mean Germany has entered a recession.
The German government, which reported the data on Friday, said the biggest hit came in March and probably worsened in April, when consumer spending, capital investment and exports — a major driver of growth in Germany — fell off a cliff.
“Things will get worse before they get better,” Carsten Brzeski, the chief eurozone economist at ING, said in a note to clients.
The worst of the pandemic is beginning to ease, with Germany and other countries slowly easing their lockdowns, but Germany’s contraction was a reminder that even if the virus dissipates, the economic fallout could pressure the European and global economy for months or years.
The European Commission has projected that European Union economy would shrink by 7.4 percent this year, the worst recession in its history.
China’s factories maintained a brisk pace last month, but Chinese consumers were slow to resume shopping, according to official statistics released on Friday.
Many countries have been watching China’s economic performance closely because it is several months ahead of the rest of the world in coping with the virus. The Chinese economy shrank in the first three months of this year for the first time since Mao Zedong died in 1976.
Factories caught up on orders that they had struggled to fill earlier this year, when the coronavirus pandemic raced across the country. The country’s industrial production was up 3.9 percent from April of last year, better than most economists expected. Production had been down 1.1 percent in March from a year earlier and had plunged in February, when the virus outbreak was at its worst in China.
But shopping and fixed asset investment stayed weak. Retail sales were down 7.5 percent in April compared to a year earlier, marginally worse than economists’ expectations.
“We should be aware that given the continuous spread of the epidemic abroad, the stability and recovery of the national economy is still faced with multiple challenges,” said Liu Aihua, the director general of the agency’s department of comprehensive statistics.
Strong exports kept factories busy last month. Many factories were catching up on orders placed while Chinese cities were locked down. But orders for further exports have stalled, according to surveys of purchasing managers.
Despite the progress, tens of millions of migrant workers are unemployed. Many white-collar workers have suffered pay cuts. Weak consumption has some economists wondering how long China can sustain an economic rebound.
Catch up: Here’s what else is happening.
Ultra Petroleum, which produces oil and natural gas in Wyoming, filed for bankruptcy protection on Friday, its second such filing in four years. Burdened with debt, the company was struggling before the pandemic sent oil prices tumbling.
Consumer spending on video games, hardware and accessories surged to a record $10.86 billion in the first quarter of 2020, an increase of 9 percent compared with the same period last year, according to data from the NPD Group. The rise came as millions of Americans sought distractions while being ordered to shelter in place to stop the spread of the coronavirus. Games such as Animal Crossing: New Horizons, Call of Duty: Modern Warfare and Doom Eternal were top titles, and the Nintendo Switch console was a strong seller.
Vice Media will lay off 100 employees globally and 55 in the United States, the chief executive Nancy Dubuc said in an email Friday, citing both the pandemic and broader negative trends in digital media. “Some tough decisions had to be made primarily around our digital teams,” said Ms. Dubuc, who took over as chief executive two years ago. Vice had already instituted four-day workweeks for three months for staffers earning more than $100,000 in response to the pandemic, with additional pay cuts for higher-earning employees and executives.
Reporting was contributed by Clifford Krauss, Ben Casselman, Sapna Maheshwari, Tiffany Hsu, Emily Flitter, Marc Tracy, Mohammed Hadi, Liz Alderman, James B. Stewart, Kevin McKenna, Matt Phillips, Adam Satariano, Gregory Schmidt, Carlos Tejada and Daniel Victor.