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U.S. Stocks Plunge as Coronavirus Crisis Spreads U.S. Stocks Plunge as Coronavirus Crisis Spreads
(about 3 hours later)
Stocks tumbled around the world on Monday as expanding outbreaks of the coronavirus in Italy and in South Korea forced investors to reconsider the seriousness of the threat to economies in Europe and the United States. Investors in the United States have mostly shrugged off the impact of the coronavirus ravaging China. That changed on Monday, when news of the outbreak’s spread drove them to sell stocks — at a furious pace.
China’s economy has already been hamstrung by the outbreak, which has infected more than 77,000 people there and triggered quarantines that have closed factories. But rapidly spreading outbreaks elsewhere in Asia as well as Europe and the Middle East have begun to erode confidence that the virus will pass sooner rather than later. The S&P 500 index, which had reached a record high as recently as Wednesday, fell 3.4 percent, its worst single-day performance since February 2018. As analysts issued new warnings that the outbreak could drag down economies around the globe, stocks fell enough to wipe out all of the index’s gains for 2020.
“The coronavirus might be slowing in mainland China, but the huge jump over the weekend to various other countries has many reassessing 2020 growth estimates,” Ryan Detrick, senior market strategist for LPL Financial, a money management firm, wrote in an email. He added: “We could see quickly decreasing earnings and growth outlooks.” It was a turbulent day for stocks worldwide: European markets recorded their worst session since 2016, and major benchmarks in Asia also closed down.
The S&P 500 fell more than 3.3 percent, its biggest daily decline since February 2018, while the Dow Jones industrial average fell more than 1,000 points. “There was a cavalier attitude about the virus,” said Bruce Bittles, chief investment strategist at Baird, an investment banking and money-management firm. With the threats appearing to increase, he added, “you have to think about the global economy slipping enough to cause a shortfall in earnings.”
European markets recorded their worst day since 2016, and major benchmarks in Asia also closed sharply lower. On Monday, fears were rising that the outbreak could spread further into Asia and Europe.
Investors have been jumpy since the start of the crisis in January, because of the role that China’s factories play in global business. Those factories are vital links in global supply chains, taking in shipments of raw materials and sending out everything from clothing to iPhones to auto parts. Italy reported it had 219 cases and locked down 11 towns, restricting the movements of 50,000 people. Police and military forces were deployed to ensure that only people with special permission left or entered towns covered by the order. Officials in Lyon, France, stopped a bus from Milan on Monday and confined the passengers inside over suspicions of a case onboard, the newspaper Le Parisien reported.
Hyundai, the world’s fifth-largest automaker, cited a shortage of Chinese-made parts when it temporarily stopped production lines earlier this month at factories in South Korea — and that was before a surge in coronavirus cases in that country put officials on high alert. South Korea, a major industrial center, reported 231 new cases a day after its government said it was prepared to use emergency powers if necessary. And state-owned media in Iran reported that the virus had killed 12 people there — the highest death toll outside China.
Updated Feb. 10, 2020Updated Feb. 10, 2020
China is also a huge consumer market itself: When Apple cut its sales expectations for the quarter last week, it cited both production problems linked to the outbreak and reduced demand in the country, where it had closed dozens of stores. In the United States, the Centers for Disease Control and Prevention said there were 53 people infected with the virus, up from 34 on Friday. Nearly all the new infections involve former passengers on the Diamond Princess cruise ship docked in Japan, who have been quarantined on military bases in California and Texas. British officials announced that four passengers who had been in quarantine since returning to the country were infected, raising that country’s number of cases to 13.
Since the start of the outbreak, the stock market’s reaction has been fairly restrained; the S&P 500 had continued to rise even after the World Health Organization declared coronavirus a global health emergency. Not all the news was bad. China may be getting the outbreak under control, the World Health Organization said. Health officials said the daily tally of new infections had been declining since Feb. 2 because of the lockdown around Wuhan, the city at the center of the outbreak. The Chinese government and businesses have begun chartering trains, buses and airplanes to retrieve workers who were stranded by travel restrictions put in place during the Lunar New Year holiday.
But the virus’s spread over the weekend has contributed to fears that the outbreak is reaching the point where it will drag on growth, including in the United States, where until now analysts had only whittled around the edges of expectations. “We’re encouraged by the continued decline in cases in China,” said Dr. Tedros Adhanom Ghebreyesus, the organization’s director general. Still, he cautioned that the outbreak could worsen.
The consensus estimate for first quarter growth in the United States has slipped from 1.7 percent at the end of 2019, to 1.5 percent on Monday, according to data from FactSet. Economists at Goldman Sachs, who were expecting first-quarter domestic growth of 2 percent as recently as late January, have been steadily lowering their estimate, which fell to 1.2 percent on Monday. “Does this virus have pandemic potential?” he said. “Absolutely it has.”
“The risks are clearly skewed to the downside until the outbreak is contained,” they wrote. New pessimistic forecasts about the economy began to emerge last week.
Monday’s drop across markets for stocks, bonds and commodities suggests that investors don’t believe those somewhat muted forecasts are pessimistic enough. In a note published on Friday, economists at JPMorgan Chase wrote that they expected global growth to slow to a 1 percent annual pace in the first quarter, which would be the weakest quarter of the economic expansion that began after the deep recession that started 12 years ago.
In bond markets, yields tumbled, reflecting a sharp — if perhaps temporary — downgrade of expectations for economic growth and inflation. In the United States, the consensus estimate for first-quarter domestic growth has slipped to 1.5 percent, according to data from FactSet on Monday, from 1.7 percent at the end of 2019. Economists at Goldman Sachs, who were expecting first-quarter domestic growth of 2 percent as recently as late January, have been steadily lowering their estimate, which fell to 1.2 percent on Sunday. “The risks are clearly skewed to the downside until the outbreak is contained,” they wrote.
The yield on the 10-year Treasury note fell to 1.37 percent, near the record low closing of 1.36 percent, a level touched back in July 2016. The yield on the 30-year bond is already in record-low territory at 1.83 percent. Airline and technology stocks were particularly hard hit on Monday. Delta Air Lines shares fell 6.3 percent and American Airlines slid 8.5 percent, while Apple stock fell 4.8 percent. The tech-heavy Nasdaq composite index dropped 3.7 percent.
Crude oil prices dropped, with a barrel of West Texas Intermediate crude slipping nearly 4 percent to roughly $51. It was the sharpest drop for oil since early January. The lower prices will add to pressure on OPEC and Russia to take measures to reduce oil supplies at their next meeting, which is scheduled for early March in Vienna. The sell-off continued in Asia on Tuesday morning, starting in Japan: The Nikkei 225 fell about 4 percent after the start of trading in Tokyo.
And gold — viewed as a safe place to invest during market tumult — rose to a seven-year high. Oil prices dropped, with a barrel of West Texas Intermediate crude slipping nearly 4 percent to roughly $51, a result of the reduced demand from idled factories and restricted travel.
Airline and technology stocks were particularly hard hit. Delta Air Lines and American Airlines down 6 percent and 8 percent. Shares of Apple fell more than 4 percent. The tech-heavy Nasdaq composite index dropped 3.7 percent. Investors rushed to safety: Gold — viewed as a haven during market tumult — rose to a seven-year high. It’s up nearly 10 percent since the start of 2020.
In Europe, major benchmarks were down 3 percent or more. The South Korean market ended 3.9 percent lower, after a surge in virus cases prompted President Moon Jae-in on Sunday to put the country on its highest level of alert. Other Asian markets slid, but not by as much. And money poured into government bonds, pushing down bond yields, which move in the opposite direction of prices. The yield on the 10-year Treasury note fell to 1.37 percent, near the record low closing of 1.36, a level touched back in July 2016. The yield on the 30-year bond is already in record-low territory at 1.83 percent.
Uncertainty about the potential impact of the virus remains the baseline setting for many investors, traders and analysts. In a note published on Friday, economists at JPMorgan Chase wrote that they expected global growth to slow to 1 percent in the first quarter, amid a sharp contraction of manufacturing activity. Falling yields can buttress the stock market if they reflect increased expectations for Federal Reserve rate cuts. But a similar decline might also be bad news if it is a result of broad-based expectations that growth will weaken. The difference between the two is a matter of interpretation. But the sharp decline in recent days seems to have pushed investors toward the latter view.
“While this would mark the weakest quarter of the expansion, these are still optimistic estimates with significant downside risk,” they wrote. “It’s that shift in the narrative that is forcing equity investors to have to wake up from the complacent stupor that they’ve been in,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
Update: A push notification to this article said Monday’s decline was the stock market’s worst daily drop in 14 months. After prices settled the decline turned out to be the worst in over two years. Officials at the Federal Reserve and within the Trump administration are watching the situation closely, although the central bank’s main tool for stoking growth — lowering interest rates — might not help much if factories are not producing goods and supply chains are disrupted by quarantines.
Keith Bradsher contributed reporting. Central bank officials have been clear that they did not expect to cut interest rates again unless rising risks upend their outlook for stable growth. So far, they have cautiously suggested there was no need to sound any alarms.
But that was before the spike in infections outside China over the weekend.
“The odds of Fed cuts are growing a lot,” Roberto Perli at Cornerstone Macro wrote in a note Monday. “But we need to understand that monetary policy is not well equipped to help in the situation we are facing.”
Like the Fed, the White House has been cautious in declaring the disease a major source of concern. Tomas Philipson, acting chairman of the White House Council of Economic Advisers, said at the National Association for Business Economists conference in Washington that it was too early to tell how significant the effects of the virus will be.
“We don’t know yet, we’re sort of taking a wait-and-see approach,” he said, also noting that the scale of the seasonal influenza is much more significant and that “in terms of the public health impact on the economy, I think that’s been exaggerated.”