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Global stock markets buckled on Thursday amid fears of a resurgence of COVID-19 infections in the United States, which could put the budding economic recovery in peril.

It was the worst day for North American stocks since the depths of the market crash in March, with the S&P/TSX Composite Index losing 4.1 per cent on the day, while the S&P 500 index dropped 5.9 per cent.

The dip followed a sobering reminder from the U.S. Federal Reserve on Wednesday about the monumental economic challenges that lie ahead, particularly as several U.S. states brace for the pandemic’s potential second wave.

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“I think there’s some pessimism being built into the sustainability of the reopening process,” said Craig Jerusalim, senior portfolio manager at CIBC Asset Management. “You can’t will the virus to go away just because people are tired of being locked up.”

While jarring by historical standards, however, Thursday’s sudden drop in stock-market altitude was modest relative to the steady upward trajectory of the last few months.

From the time global equities began to rally in late March, up until Monday’s close, the MSCI All Country World Index leapt by 42 per cent – a revival that added more than US$20-trillion in global market value.

The global stock boom has fast money and rookie retail investors pouring into markets in search of easy gains, even as the twin health and economic crises rage on. “There's a battle between fear and fear of missing out,” Mr. Jerusalim said.

Thursday’s sell-off could be chalked up to investors taking some money off the table after realizing enormous profits in a relatively short period of time.

“It's hard to look beyond profit-taking as the culprit given how far equities climbed,” Stephen Innes, chief global markets strategist at AxiCorp, wrote in a note.

That rationale is supported by the make-up of Thursday’s market rout, which put the most pressure on some of the hottest parts of the market. Airline and cruise line stocks, for example, which rallied hard starting in mid-May, were mostly hit with double-digit losses on the day. Air Canada’s stock, which as of Monday was one of the best performers in the S&P/TSX Composite Index over roughly the prior three weeks, ended the day down by 8.5 per cent.

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Investors looking for a trigger to sell may have found one in the Federal Reserve, which on Wednesday said it plans to maintain an extraordinary level of monetary stimulus to contend with what could be years of economic hardship.

“The idea of a drawn-out recovery put out by the Fed rather flies in the face of the v-shaped reopening trade that has taken hold in markets,” wrote Jasper Lawler, head of research with London Capital Group.

The latest outlooks for the global economy are also distinctly negative. This week, the OECD said it expects a 6-per-cent drop in global GDP in 2020, and an 8-per-cent decline in the Canadian economy, exceeding in severity economists’ consensus for the recession on both counts.

In keeping with heightened growth fears, economically sensitive stocks were dealt a heavy blow on Thursday. The S&P/TSX Capped Energy Index dropped by 9.8 per cent, effectively wiping out the gains realized through a solid run in early June.

To the extent that stock markets were also factoring in steady progress in fighting the pandemic, the latest data from public health officials is proving an additional drag on investor sentiment.

On Wednesday, the U.S. hit two million confirmed COVID-19 cases, according to Johns Hopkins University. In nearly half of U.S. states, many of which were among the earliest to reopen their economies, infections are on the rise, according to an Associated Press analysis.

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Eric Toner, a senior scholar at the Johns Hopkins Center for Health Security, said, “There is a new wave coming in parts of the country. It’s small and it’s distant so far, but it’s coming.”

With a file from Reuters

Read more: Stocks that saw action Thursday - and why

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