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Stocks extend losses, with the Dow falling 400 points to snap a 6-day winning streak

Stocks fell sharply on Tuesday as investors took some money off the table following a relentless comeback rally that pushed the S&P 500 into positive territory for the year amid a recession from the coronavirus pandemic.

The Dow Jones Industrial Average traded 400 points lower, or about 1.5%. That decline put the 30-stock average on pace to snap a six-day winning streak. The S&P 500 slid 1.1% while the Nasdaq Composite dropped 0.4%.

The speculative trades that have led the latest leg of the market’s comeback on optimism about the reopening of the economy were lower Tuesday. United Airlines and Delta Air Lines each dropped more than 10%. Cruise lines Carnival and Royal Caribbean declined more than 7.4%. Retail-related trades Gap and Simon Property Group dropped as well. 

The moves Tuesday followed sharp gains on Wall Street a day earlier, with the S&P 500 returning to positive territory for 2020 as fears over the coronavirus continued to give way to optimism about the reopening of the American economy.

The S&P 500 leaped 1.2%, or 38.46 points, to 3,232.39 during Monday’s regular session and turned positive for the year in a quick about-face following the springtime fears over the virus. The broad market index is now more than 47% off its March low. At one point this year, the S&P 500 was down more than 30% from its all-time highs. It’s now positive for 2020 by 0.05%.

The Nasdaq Composite gained 1.1% on Monday and hit its own fresh high, bringing its year-to-date advance to 10.6%. The Dow Jones Industrial Average, meanwhile, added 461 points, or 1.7%, trimming its year-to-date losses to just 3.3%.

The gains came Monday even as the official economic arbiter in the U.S. declared that the economy entered a recession earlier this year. The National Bureau of Economic Research determined that a “clear peak in monthly economic activity” occurred in February. 

Traders say the market’s hot streak over the last two months is in large part thanks to confidence about the reopening of the U.S. economy and a barrage of government stimulus. 

Market optimists pointed to improving economic signals for the most recent rallies, including the government’s far-better-than-expected jobs report last week. The Labor Department said Friday the economy added 2.5 million jobs in May, a record. Economists polled by Dow Jones had forecast a drop of more than 8 million.

“Recent data points like the jobs report and not-as-bad-as-feared company updates have fueled the view that the worst of the declines could be behind us,” a team of RBC Capital Markets analysts told clients Monday. “The risk-on trade really is gaining traction. Valuations have spiked to historical highs in many industrial sub-sectors, signaling a strong recovery is potentially taking hold.”

But some investors are starting to wonder whether the move as gone too far, too fast considering the economy as just started to reopen. The Federal Reserve begins a two-day meeting Tuesday.

All in, the S&P 500 is up 47% from its March low. Much of those gains have been thanks to the so-called reopening trade, those stock that would benefit the most if all the Covid-19 precations and business closures were removed.

Airline shares, which swooned in March amid travel restrictions and contagion fears, have been one of strongest groups of late. Delta, United and American Airlines are up 62.7%, 91.5% and 100.3% over the last month alone. Another “reopening” group, cruise line operators Carnival and Norwegian Cruise Line are up 75.3% and 116% over the same period. 

“Equities continue to trend higher in anticipation of improving economic conditions,” said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management. “But I think it’s premature to declare happy days are here again.”

“What gives us caution is the duration of Covid-19 remains unknown,” said Sandven. “We don’t have treatments, we don’t have prevention and we’re a little bit at the mercy of how fast the virus spreads.”

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