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Dow Jones on Edge as Fed Insider Admits Recession Is Unavoidable

  • Dow Jones Industrial Average (DJIA) swung wildly overnight, pointing to a nervous stock market open.
  • Former Federal Reserve advisor said there’s little chance of avoiding a recession.
  • Millions of jobs will be lost in the U.S. as major cities go into lockdown over the coronavirus.

The stock market looks poised for a nervy open on Tuesday after the worst day since 1987. Dow Jones Industrial Average (DJIA) futures swung wildly overnight. An early bounce triggered the ‘limit up’ circuit breaker, before giving back most of the gains again this morning.

Traders are increasingly pricing in the chance of a full recession and even a longer-term depression. Former advisor to the Federal Reserve board, Andrew Levin, said a slowdown is inevitable.

I don’t see how we’re going to avoid having a recession.

New York and San Francisco, the economic centers of America, both went into effective lockdown on Monday as President Trump urged citizens to stay at home.

Dow futures give up gains

Dow Jones futures jumped as much as 5% overnight, triggering the upper circuit breakers. The attempted relief rally was short-lived and stock futures gave up all the gains before bouncing off zero again.

Dow Jones Industrial Average (DJIA) futures swung wildly in after-hours trading. Source: Yahoo Finance

S&P 500 futures were up 0.9% while Nasdaq Composite futures were up 1.6%.

Recession is inevitable

The global economy is slowly grinding to a halt as the coronavirus forces entire countries to shut down. The first layoffs in the U.S. have already begun as shops, bars, and restaurants close up. Nelson Loh at Novena Global Lifecare said he expects it to get worse.

Unfortunately job cuts will happen. I think most of us have that expectation… Given the spillover into Europe and the US, this has become a global problem, not an Asia problem.

If this crisis descends into a full recession, we could see as many as 3.5 million jobs lost in the U.S. alone. Fed advisor Andrew Levin explains further:

The problem for the U.S. economy is a lot of cities are shutting down, and people staying home, not going out to restaurants, not going out shopping, not buying cars.

Dow Jones hasn’t priced in a depression yet

The vicious stock market selloff may just be the beginning, according to some Wall Street analysts. Traders have so far priced in a recession, but not a longer-term slump, or depression.

Wall Street witnessed the worst day in over 30 years and there’s more woe coming. | Source: AP Photo/Mark Lennihan

Frances Donald, global chief economist at Manulife Investment Management explains:

This market looks like it has already priced in most of a garden variety recession. It is now on top of that having to price in some probability of a credit crisis … A 2008-like financial contagion is not yet priced into this market.

She said only a slowdown in coronavirus cases or a sense of calm in the credit markets would end the rout. Even then, it will take time to reveal the true effect of the virus on the U.S. economy. Chinese numbers are only just coming through, and it’s not good.

Can we avoid the worst-case scenario?

If a recession is inevitable, how do we stop it evolving into something much worse? Analysts say that only government fiscal action will help, after Federal Reserve monetary action fell flat.

The White House is looking to issue an $800 billion stimulus package this week. The fiscal injection is expected to support businesses as the country goes into lockdown.

Half is expected to go to small businesses and workers while the other half may be used to fund a payroll tax break until the end of the year. Director of the National Economic Council Larry Kudlow also said the government would support airlines if required.

This article was edited by Samburaj Das.

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