Dow Slides as One Monster Bankruptcy Threatens Stock Market Crash

Dow Slides as One Monster Bankruptcy Threatens Stock Market Crash
  • Dow Jones Industrial Average (DJIA) futures point to a strong open on Tuesday.
  • Boeing CEO thinks at least one major airline will go bust this year, which could have a ripple effect on the stock market.
  • Traders remain cautious as coronavirus cases tick higher in re-open states.

The U.S. stock market is pushing cautiously higher this morning. Dow Jones Industrial Average (DJIA) futures point to a triple-digit gain at the open.

But there’s another big threat on the horizon: bankruptcies. Boeing CEO David Calhoun just sent a warning sign to the market, suggesting at least one major airline could go bust this year. Asked whether the pandemic could force U.S. airlines out of business, he said:

Yes, most likely. You know, something will happen when September comes around.

A major bankruptcy in the airline space would have a domino effect on Boeing, and the Dow Jones as a whole.

Dow futures choppy overnight

Dow futures plummeted more than 200 points overnight as analysts warned of a ‘double dip recession’. But the index clawed back the losses and pushed higher in the early hours of Tuesday.

Dow Jones Industrial Average (DJIA) futures turned positive after a choppy overnight session. Source: Yahoo Finance

S&P 500 futures were down 0.18% while Nasdaq 100 futures look set to end a six-day winning streak, down 0.14%.

Airlines burning $400 million every day

Speaking to NBC Today anchor Savannah Guthrie, Calhoun delivered a grim assessment of the airline industry. He believes airlines will be lucky to recover a quarter of their traffic this year.

Traffic levels will not be back to 100%. They won’t even be back to 25%.

In the meantime, airlines are burning through $400 million every day and passenger traffic is down 94%. Additionally, new 14-day quarantine measures for inbound travellers threatens to kill demand for anything except absolutely essential travel.

Calhoun didn’t speculate as to which airline, but the most vulnerable is American Airlines. The company carries the most debt and is burning $50 million a day in expenses.

Dow constituent Boeing will feel the pain

Plane maker Boeing will feel the ripple effects of this fallout. Southwest has already halved its next Boeing order. American Airlines is taking 43 Boeing planes out of service.

As the single largest constituent in the Dow Jones, Boeing will weigh the entire stock market down if one of the airlines goes bust. As Quartz notes:

When Boeing goes south, it drags the Dow with it.

Stock markets nervous as virus flares up in re-open states

Despite the early morning spike, traders are still cautious about America’s re-opening. Former FDA Commissioner Scott Gottlieb warned that some states that eased lockdown measures early are battling new coronavirus flareups:

Data seems to be indicating that cases are rising in reopen states.

He cites Alabama, South Dakota and Texas among the biggest risers. Meanwhile, public spaces in Colorado are already bustling. White House advisor Dr. Anthony Fauci is also expected to warn the Senate today about the perils of re-opening too early.

Fears of a second wave are also rising in Asia. The city of Wuhan, where the virus is believed to have originated, will test all 11 million residents after a new cluster was discovered.

How is Wall Street playing the stock market today?

Wall Street is still split on where the market is going in the coming months. Credit Suisse chief equity strategist Jonathon Golub struck a cautious tone. He doesn’t see much room higher for the stock market until the coronavirus is brought under control.

The market is going to have real limited upside here until we see the conditions are getting a little bit better, whether it’s therapeutic or whether it’s something else.

But JP Morgan took a more optimistic view. Analyst Ben Mandel says the bank has a “buy the dip mentality” until there’s a major shock to change their thesis.

We’re sitting about overall neutral in terms of risk in our portfolio, but with a bias to be adding.

Edit: this article was updated at 8.10 am ET to reflect updated prices.

This article was edited by Samburaj Das.

Last modified: May 12, 2020 12:10 PM UTC

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