(Photos: Shutterstock; compilation: Chris Nicholls/ALM)

Maybe the stock market really did get ahead of itself in its recent rally, as some had warned.

By late morning Monday the Dow Jones Industrial Average had given up much of the 500 points it gained on Friday — a rally that followed three days of losses in a row and capped its worst weekly performance in almost three months.

The Dow was off over 300 points, down 1.2%, and the S&P 500 index was down 0.77% around noon on Monday.

Optimism about a nationwide economic recovery as all 50 states began to reopen after COVID-19-related lockdowns had propelled stocks upward. But by Monday morning that optimism began to falter as more than 20 states were reporting a resurgence of cases — many with a rise in hospitalizations — and China announced a new lockdown in Beijing because of a resurgence in cases.

In addition, layoffs continue despite the last jobs report showing a decline in the jobless rate. Last Thursday’s weekly jobless claims report showed 1.5 million Americans filed initial claims — the lowest number since the pandemic began, but still far higher than normal levels. The net worth of U.S. households and nonprofits fell $6.5 trillion during the first quarter as domestic nonfinancial debt jumped 11.7%.

There are currently more than 2.14 million confirmed COVID-19 cases in the U.S. and over  115,000 deaths, and the Centers for Disease Control and Prevention have projected between 125,000 and 140,000 deaths by July 4.

As Federal Reserve Board Chairman Jerome Powell said Wednesday, “The extent of the downturn and the pace of recovery remains extraordinarily uncertain and will depend in large part on our success in containing the virus.”

On Thursday, the Dow plummeted almost 7%, to 25,169, and the S&P 500 lost nearly 6%, closing at 3,007.

Even in early trading on Thursday, when the Dow was down about 700 points, Liz Ann Sonders, chief investment strategist at Charles Schwab, referred to Thursday’s stock market behavior as a “reality check.”

Ellen Zentner, the chief U.S. economist at Morgan Stanley, offered her check on the U.S. economy in a conversation with Securities and Financial Markets Association President and CEO Ken Bentsen last Thursday.

This is a “completely new world,” with the “sharpest drop into recession on record,” said Zentner, who chairs the SIFMA Economic Advisory Roundtable of more than 20 global and regional financial institutions.

The U.S. economy, which had been growing an annualized 2.1% rate in the fourth quarter of 2019, at the end of the longest expansion in its history, fell into recession in February, according to the National Bureau of Economic Research.

A survey of SIFMA’s economic roundtable members released recently forecast that the U.S. economy will be fully recovered by the end of next year. Growth is forecast to rise to 4.7% by the four quarter of 2021 from -5.5% in the fourth quarter of this year.

“Participants are not sure what the other side will look like,” Zentner said. ‘Many questions remain … which matter in terms of longer-run GDP. It’s just too early to tell.”

Those questions include when a vaccine for COVID-19 will be available, the durability of working from home, how many workers will come back to work and whether there will be a second wave of infections. “There is a laundry list of unknowns,” Zentner said.

She said Morgan Stanley’s own biotech expert expects a second wave of infections this fall.

In the meantime, the economy has begun to grow as states begin to reopen. The economists surveyed by the SIFMA roundtable expect the U.S. economy won’t fully recover from the impact of the coronavirus pandemic until well into 2022, Zentner said.

She noted that “more needs to be done” in terms of federal fiscal stimulus to support the unemployed and state and local governments — around $1 trillion more.

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