Dow slides more than 500 points as the economic outlook gets drearier

The Dow (INDU) shed 550 points, or 2.2%, while the S&P 500 (SPX) — the broadest measure of Wall Street — fell 1.9%. The Nasdaq Composite (COMP) dropped 2%.
Banks were among the worst performers following the results of the Federal Reserve’s stress test late Thursday.

Although America’s financial institutions got a clean bill of health from the central bank, they will be required to further shore up their capital to protect themselves against losses and preserve their ability to lend to the country’s struggling businesses.

Banks also won’t be allowed to buy back shares in the third quarter of the year and shareholder dividends will be capped.

On Friday, the Bureau of Economic Analysis reported that consumer spending rebounded in May, but Americans’ income dropped sharply as government payouts declined. That’s bad for the consumer spending-addicted US economy: if people don’t have money to spend, recovering from the pandemic recession will take longer.

Meanwhile, the University of Michigan reported consumer sentiment slipped in the second half of June, in lockstep with a resurgence in Covid-19 cases in parts of the country.

So far, the stock market has proven somewhat resilient against the climbing new infection rates in states like Texas and Florida. This is partly due to the Fed’s commitment to loosen its monetary policy.

The big post-lockdown rally that sent stocks higher as the economy began to reopen might have priced the central bank stimulus in fully, suggested Fawad Razaqzada, market analyst at ThinkMarkets, so a renewed selloff over virus fears could result in a more profound downturn.

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