Yet by the end of the day, the S&P 500 stock index had risen 2.7 percent.
That’s been the pattern lately. The drumbeat of grim news — one million known coronavirus cases in the United States, businesses are collapsing, the unemployment rate could reach 16 percent — has done little to deter stocks’ upward march.
Since March 23, when the Federal Reserve announced plans to make unlimited purchases of financial assets to prop up Wall Street, the S&P 500 has soared by more than 31 percent. The unlikely rally created more than $5 trillion of stock market wealth, allowing investors to reclaim more than half of their losses from a steep sell-off earlier this year, in the early days of the pandemic.
Why are stocks climbing when news about the economy isn’t getting much better, and the severity of the public health crisis has barely abated? There are two main reasons: First, trillions of dollars of stimulus money from the Fed and Congress come with an implicit guarantee that the government will limit investors’ risk no matter how bad it gets. Second, the periodic glimmer of positive news fuels investors’ optimism that things can only get better.
Wednesday delivered on both fronts, after officials said that an antiviral drug made by Gilead Sciences showed promise in treating Covid-19, the disease caused by the coronavirus. Also, the Federal Reserve said it would hold interest rates near zero and continue to do everything it could to stabilize the economy.
“What the market is rallying on is the expectation that whatever the world looks like nine or 12 months down the road, it’s going to look better than it does now,” said Scott Clemons, chief investment strategist for private banking at Brown Brothers Harriman.
“On any given day the market might latch onto a particular piece of good information,” Mr. Clemons added. “Today it’s the Gilead press release and the market focused on that. But tomorrow’s another day.”
The direction of the stock market is always determined by a complicated mix of hard data and investor psychology. The price of a stock is based on how much money investors think a company can make in the future. So investors care less about the actual facts reflected in today’s headlines, and more about what kind of picture those facts paint about the coming year.
To investors, it’s abundantly clear that the American economy is already in a deep recession. More than 20 million jobs have been wiped out in little more than a month. Corporate profits are widely expected to collapse.
So when fresh economic reports emerge, such as Wednesday’s announcement from the Commerce Department that first-quarter gross domestic product fell at a 4.8 percent annual rate, they provide little new information to investors.
“The market has mostly written off 2020,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “What they’re looking for is for the recovery to start.”
Over the last month investors have latched on to a series of indications that the worst-case scenarios for the economy could be mitigated.
The federal government has acted quickly, with the passage of a roughly $2 trillion stimulus bill, the largest ever economic rescue legislation, in late March. Markets have also been given a lift by the Fed, which has pumped more than $2 trillion into financial markets.
“Stimulus has been the engine that has stabilized and driven asset prices higher,” said Julian Emanuel, chief equity and derivatives strategist at the brokerage firm BTIG.
Another slug of positive news that investors are factoring in comes from the health data. The pace of new infections has slowed sharply as lockdowns continue around the country. Some states, such as Tennessee, Georgia and South Carolina, are beginning to open up and others, including New York and California, are laying out their criteria for doing so.
Other updates, such as Wednesday’s hopeful statements on the potential of Gilead’s remdesivir drug, have reinforced the narrative that things are improving. Shares of Gilead rose 5.7 percent after the company said it was “aware of positive data” from a federal trial of its experimental coronavirus drug. Already, speculative bits of news about the drug’s potential had twice lifted the market in recent weeks.
Later in the day, the National Institute of Allergy and Infectious Diseases issued a statement saying its study of the drug showed that it sped up recovery in hospitalized patients with advanced Covid-19.
“The evidence is continuing to mount that remdesivir is having a true treatment effect,” said Dr. Brian Abrahams, co-head of biotechnology equity research at RBC Capital Markets in New York. Dr. Abrahams stressed, however, that it remained unclear what the magnitude of that benefit would be to patients.
It was clear on Wednesday that investors extrapolated this shred of good news into a brighter outlook for the economy. The Russell 2000 index of small capitalization stocks soared nearly 5 percent. Such smaller stocks tend to be less globally diversified than larger companies, meaning they’re more reliant on the U.S. domestic economy.
Some of the biggest jumps were in parts of the market that have been hardest hit by the virus. Norwegian Cruise Line Holdings rose more than 20 percent. Royal Caribbean and Carnival also rose more than 15 percent each. The energy giants Exxon Mobil and Chevron — hard hit by the 70 percent collapse in crude prices this year — were both up more than 5 percent.
Technology giants also climbed after Alphabet, Google’s parent company, reported better-than-expected sales results after the close of trading on Tuesday. Since Microsoft, Apple, Amazon, Facebook and Alphabet are among the most highly valued companies in the United States, their heft gives them outsize sway in market-cap-weighted stock market indexes such as the S&P 500.
“A lot of it really is about hope,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, an investment company. “You’re getting little hints of hope.”