Stock market drops as coronavirus cases increase

Market news | 6.11.20

U.S. Bank Capital Market Update: Choppy waters but the glass remains half full

Summary highlights:

  • The largest percentage drop in the S&P 500 since mid-March reversed two weeks of gains
  • The current capital market landscape is fluid and two-sided price volatility remains a key market feature
  • Policy is important to continued gradual economic improvement and repair
  • Investors who center on a well-defined financial plan can weather today’s market volatility
  • We retain our “glass-half-full” view of the path forward

The current capital market landscape remains highly fluid as investors contemplate news flow related to COVID-19 (novel coronavirus), the economy, and policy responses to bridge the gap to an eventual sustained economic recovery.

Today, U.S. equity markets followed global markets sharply lower with the Chicago Board Options Exchange (CBOE) Volatility Index, a measure of market volatility, surging nearly 50 percent. The S&P 500 fell 5.9 percent, the largest percentage drop since the 12 percent decline on March 16th. The worst-performing sectors today, Energy, Materials, and Financials, had risen sharply in the most recent market upswing. They are also sensitive to investors’ forward growth expectations and are subject to more speculative rallies.

Causes for today’s weakness

Global markets remain in a muddle-through recovery period, subject to two-sided outcomes in three key areas: growth in COVID-19 infections; the magnitude and pace of labor market recovery; and policy support from the Federal Reserve and government stimulus. Today’s market action reflects realization of these risks relative to the previous constructive tenor of progress.

  • The COVID-19 (novel coronavirus) pandemic is ongoing, with confirmed cases numbering 7.5 million worldwide. Virus resurgence remains a key risk as the economy reopens and resurgence risk rose to the forefront with Texas reporting the single highest daily increase in new cases since the virus’s outbreak.
  • Today, the Department of Labor documented 21.5 million Americans filed for continuing unemployment insurance standing in stark contrast to payroll gains in May of 2.5 million jobs announced a week ago. Investors will remain challenged to project significant future economic recovery should labor markets continue their uneven and unclear progress toward recovery.
  • With a balance sheet exceeding $7 trillion and interest rates near zero the Federal Reserve (Fed) remains an important support for well-functioning markets and improving economic sentiment. In yesterday’s virtual press conference, Fed Chair Jerome Powell noted that additional stimulus may be necessary to raise and elongate the bridge to reach the next horizon of economic growth, stating that the Fed is “strongly committed to using our tools to do whatever we can, and for as long as it takes.” (

Over the past several weeks, riskier asset class performance had been positive and prices extrapolated a more positive future path after last week’s surprising Bureau of Labor Statistics report and a stronger-than-expected policy response from the European Central Bank (ECB) and the traditionally staid German government.

In our latest market commentary, we noted that market optimism appeared justified, given net positive job hiring in May suggested a faster-than-anticipated economic reopening, but we cautioned that risks remain and that we expect to see continued volatility in parts of the market that may have extrapolated a too buoyant future relative to our analysis.

Contextualizing today’s market action within the global economic and policy framework outlined above, we are mindful of risks but continue to hold a glass-half-full outlook:

  • Companies continue to hire, evidenced by last Friday’s report.
  • Consumers are transitioning to more normal life activities as states continue to reopen.
  • And as we’ve written in the past, the medical concept of gradual improvement and repair over time, homeostasis, continues.

While we view price volatility as an ongoing market feature during this muddle-through phase, we strongly believe the most powerful thing you can have is an investment plan. Working with your U.S. Bank team, determining the right asset mix and plan for your unique situation remains job number one. Investors who center on a well-defined financial plan can weather today’s market volatility and work in concert with their lifestyle. As we have said often, living and investing within your means is critical, and today’s data does not alter the need for a plan or the need to remain within your means.

We will keep you posted on any changes to our views that could affect your specific portfolio. As always, thank you for your trust and do not hesitate if we can help in any way.

Print PDF

This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults). Investments in mortgage-backed securities include additional risks that investors should be aware of, such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments.

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.