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(CNN Business) - Wall Street's runaway train has been derailed by a force almost as powerful as easy money: a healthy dose of reality.
The Dow fell 1,800 points, or 6.8%, on the biggest sell-off since early April on Thursday. Even the Nasdaq, which was red-hot, fell 5.1%.
- READ: The Dow plummets (over 1,800 points) as investor fears about the economy rise
The abrupt sale was largely fueled by fears of a resurgence of the coronavirus pandemic that wrecked the economy. Several US states that reopened a few weeks ago are now reporting an increase in infections and hospitalizations.
Wall Street is not ready for a possible second wave of the pandemic. This would completely undermine the extreme optimism about the economy that had catapulted US stocks to record levels.
- LOOK: The three reasons why the stock market recovers while millions are still out of work
"The recovery in the stock market from the lows on March 23 was simply overstated," said David Kelly, chief global market strategist at JPMorgan Funds. “We are still in a very deep recession. We still have great uncertainty about the virus, but also about stimuli and politics, "he added.
But you wouldn't know this by looking at the markets, which have emerged from even the most dire news about the economy. Powered by unprecedented stimulus from the Federal Reserve, the S&P 500 rose as much as 44% from its lows. The Nasdaq was up 46% and had already set new highs.
"The market is setting prices in a V-shaped recovery. But what you really have is a big depression, a bump and then a drag until we get a shot," Kelly said.
"Mass unemployment" will not disappear in the short term
The surprisingly strong report on employment in May, which showed an unexpected rise in hiring, raised hopes of a solid economic recovery.
But the Labor Department reported Thursday that another 1.5 million Americans applied for unemployment benefits for the first time last week. The good news is that these initial claims have decreased for 10 straight weeks. The bad news is that they are still extremely high.
Before this crisis, the largest weekly jobless claims figure was 665,000, during the Great Recession. In other words, claims continue to more than double the previous record rate.
"Mass unemployment will be the main condition that defines the economic narrative in the future," wrote Joe Brusuelas, chief economist at RSM International, in a report on Thursday.
Hospitalizations increased in 12 states
Meanwhile, coronavirus numbers have deteriorated in recent days, raising fears that the health restrictions that caused the mass layoffs in the first place will be reinstated. A second wave would slow down the economy, hurt corporate profits, and affect consumer and business confidence.
- READ: USA exceeds 2 million cases of coronavirus; expert warns that deaths will almost double in September
Although trends in hardest hit states like New York and New Jersey continue to improve, there has been an acceleration of cases in some states that have already reopened. Coronavirus hospitalizations have increased in 12 states since Memorial Day weekend: Alaska, Arkansas, Arizona, California, Kentucky, Mississippi, Montana, North Carolina, Oregon, South Carolina, Texas and Utah.
Morgan Stanley biotechnology analyst Matthew Harrison called the trends "manageable," but noted that they are a "troubling sign of the fall" when space in hospitals is more limited and people are trapped in their homes.
Harrison rejected the argument that the recent increase in cases is primarily due to increased evidence.
"We conclude that active community outreach is likely to continue," Harrison wrote in a report Thursday for customers.
Is the worst of the covid-19 in the US coming? Depends on who you ask 1:49An influential model cited by the White House now predicts that daily deaths will decrease in June and July, before registering a sharp increase in September.
"The market is not ready for a second wave that would result in additional closings," said Jeff Kleintop, chief global investment strategist at Charles Schwab.
- LEE: Model predicts 170,000 deaths from coronavirus in the United States for October
Despite worsening coronavirus trends, Treasury Secretary Steven Mnuchin said the federal government will no longer lock up the entire nation to fight the pandemic.
"We cannot shut down the economy again," Mnuchin told CNBC on Thursday. “We have learned that if you close the economy, you will create more damage, not just economic damage. Medical problems and everything else that is on hold, "he added.
However, some parts of the country may need to re-establish some health care restrictions if outbreaks arise.
Crushed airlines and cruise companies
Optimism about pandemic trends led investors to gamble in recent weeks on the most exposed sectors of the stock market, including airlines, cruises and hotels. That trend is now being reversed.
Miami reopens its beaches: recommendations to go 2:05American Airlines fell more than 10% on Thursday, resigning part of its impressive 68% increase in a month. Spirit Airlines lost 15%, erasing part of its surprising 84% rise in the month prior to that date.
Likewise, Royal Caribbean and Carnival fell in double digits on Thursday. Both had risen more than 49% in the previous month.
The energy market also took a hit, and investors sold shares of oil companies with big debts like Occidental Petroleum, which fell 13%.
Oil prices in the United States, which had risen from -40 dollars a barrel on April 20 to 40 dollars this week, fell. Crude fell 8% to $ 36 a barrel.
- READ: Oil has risen $ 80 in 7 weeks ... but the recovery may be too good to be true
"The idea that the demand for hotels, the travel industry or the demand for energy will come back quickly, those are dreams," said Kelly of JPMorgan.
The hopes of the vaccine
Amid the market crisis, President Donald Trump expressed confidence in the economic and health prospects.
"We will have a very good third quarter, a great fourth quarter and one of our best years in 2021," Trump tweeted Thursday. “We will soon have a vaccine and a therapeutic cure. That's my opinion. LOOK! ”He added.
Vaccine development in the US, under political pressure 0:23Dr. Anthony Fauci, the nation's leading infectious disease expert, has said he is confident that a vaccine candidate will be tested as safe and effective by the first quarter of 2021. But some doctors say that is a very optimistic framework. .
- READ: Covid-19 is Dr. Anthony Fauci's "worst nightmare"
Kelly warned that there is no guarantee that a vaccine will be effective, nor that the majority of the population will agree to give it.
"We could be haunted for this for some time," he said.
The strong sale of shares on Wall Street on Thursday will bring back bad memories of the turmoil in February and March that rocked the markets.
But Kleintop's Schwab does not believe US stocks will necessarily return to their March 23 lows.
"Maybe we just need to rest for a few weeks from the race," said Kleintop.
Still, given the rapid rise in the stock market in this span, it could be a painful break.
New York Stock Exchange coronaviruscovid-19