Wall Street Recovers Early Losses as Stocks Climb After Worst Drop in Four Months

By mid-afternoon on Thursday, the S&P 500 was up 1.9%, having started the day down 0.3%. The turnaround came a day after the index fell 3.5%, its worst drop in more than four months, on fears that a worsening pandemic would again drag down the economy and corporate profits.

Traders had two pieces of encouraging data to work with. The government estimated that the economy grew at a record annualized rate of 33.1% from July through September, following a contraction at a 31.4% annualized rate from April through June. And 751,000 U.S. workers applied for unemployment benefits last week, down from 791,000 the week before and better than economists had forecast. That figure is still extremely high compared with the period before COVID-19.

As of 2:19 p.m. Eastern, the Dow Jones Industrial Average had gained 369 points, or 1.4%, to 26,891, and the Nasdaq composite was up 2.4%. Technology and communication stocks led the rally within the S&P 500. Four of the market's heaviest names, Apple, Amazon, Facebook and Google's parent company, were up between 2.8% and 5.5% ahead of earnings reports due after the close. Because of their size, their moves count for far more in the indexes than those of other companies.

Expectations for Big Tech are high. Investors have bid up the shares on the belief that profits will keep climbing as work-from-home and other pandemic-accelerated trends persist. Microsoft showed the risk on Wednesday, when its stock slid 5% despite reporting profit and revenue that beat Wall Street's forecasts. Analysts have noticed that stocks are getting less of a lift than usual from better-than-expected earnings. Even so, the reporting season has been better than feared: S&P 500 earnings per share are on track to fall about 13% from a year earlier, far milder than the nearly 21% decline analysts forecast at the start of October, according to FactSet.

Caution remains. A measure of investor fear in the U.S. market touched its highest level since June before easing Thursday, and oil kept falling on demand worries. Benchmark U.S. crude dropped 3.3% to $36.15 a barrel, and Brent lost 3.1% to $38.43. The 10-year Treasury yield rose to 0.84% from 0.79% late Wednesday.

Coronavirus cases are rising in the United States as well as Europe. Even if the sweeping lockdowns of earlier this year don't return, the worry is that a worsening pandemic could keep customers away and cut into profits. "The future still looks cloudy," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, adding that the virus will determine consumer behaviour.

Washington has not helped. Congress and the White House have not agreed on more support for the economy since the last round of supplemental benefits for laid-off workers expired in the summer. On Thursday, House Speaker Nancy Pelosi sent Treasury Secretary Steven Mnuchin a letter listing the topics she is still waiting to hear back on, including benefits for laid-off workers and coronavirus testing measures. Hopes of a quick deal are fading.

In Europe, stocks first rose, then levelled off after the head of the European Central Bank said there is "little doubt" it will deliver more stimulus in December. Markets there were recovering from Wednesday's sharp slide, after France and Germany announced new business restrictions. Germany's DAX gained 0.3%, while France's CAC 40 and London's FTSE 100 were unchanged. In Asia, Japan's Nikkei 225 slipped 0.4% after its central bank held policy steady but downgraded its outlook because of COVID-19 outbreaks. South Korea's Kospi fell 0.8%, Hong Kong's Hang Seng lost 0.5%, and Shanghai rose 0.1%.

The things to watch now are the Big Tech earnings after the bell and whether Washington reaches any agreement on additional economic support.