Dow tumbles into bear market under virus fears
NYSE, March 11, 2020 (NYSE via FOX)
NEW YORK - Stocks tumbled again Wednesday as fears about the economic damage from the coronavirus intensified and investors questioned whether any economic response from Washington would be enough — if it happens at all.
The Dow Jones Industrial Average dropped 1,464 points, dragging it 20% below the record set last month and putting it in a bear market. The broader S&P 500 index, which professional investors watch more closely, is a single percentage point away from falling into its own bear market, which would end the longest bull market in Wall Street history.
The decline has been one of the swiftest sell-offs of this magnitude. The fastest the S&P 500 has ever fallen from a record into a bear market was over 55 days in 1987.
Vicious swings like Wednesday's session are becoming routine as investors rush to sell amid uncertainty about how badly the outbreak will hit the economy. The day's loss wiped out a 1,167-point gain for the Dow from Tuesday and stands as the index's second-largest point drop, trailing only Monday's plunge of 2,013.
With Wall Street already on edge about the economic damage coming from the virus, stocks dove even lower Wednesday after global health officials declared the outbreak a pandemic.
Investors are calling for coordinated action from governments and central banks around the world to stem the threat to the economy from the virus. Doubts are rising about what can come from the U.S. government, though, even after President Donald Trump promised some aid.
Investors know that lower interest rates or government spending programs alone will not solve the crisis. Only the containment of the virus can do that. But such measures could help support the economy in the meantime, and investors fear things would be much worse without them.
The Bank of England became the latest big central bank on Wednesday to make an emergency interest-rate cut in hopes of blunting the economic pain caused by the virus, which economists call the global economy's biggest threat.
The stakes are rising as the World Health Organization cited "alarming levels of inaction" by governments in corralling the virus when it made its pandemic declaration.
"The government probably should have been thinking about stimulus last month," said Kristina Hooper, Invesco's chief global market strategist. "Every day that passes makes the economic impact of coronavirus that much worse."
Many investors are worried that a divided Congress will have trouble agreeing to any plan, she said.
Besides worries about the virus and the government's ability to get something done for the economy, the market was also weighed down by a continued decline in oil prices, said Patrick Schaffer, global investment specialist at J.P.Morgan Private Bank.
"I want all retail investors to expect this environment will continue: sharp down days, sharp up days," he said. "This feeling of whiplash that people feel probably continues for some period of time."
The speed of the market's declines and the degree of its swings the last few weeks have been breathtaking. The Dow Jones Industrial Average has had seven days in the last few weeks where it swung by 1,000 points. That has happened just three other times in history.
For most people, the new coronavirus causes only mild or moderate symptoms, such as fever and cough. For some, especially older adults and people with existing health problems, it can cause more severe illness, including pneumonia.
The vast majority of people recover from the new virus, but the fear is that COVID-19 could drag the global economy into a recession by hitting it from both sides — supply and demand.
On the supply side, the worst-case scenario has companies with fewer things to sell as factories shut down and workplaces dim the lights because workers are out on quarantine. On the demand side, companies see fewer customers because people are huddling at home instead of taking trips or going to restaurants.
United Airlines has lost more than a third of its value since Feb. 21 because many people don't want to risk flying. Cruise lines have also been hard hit. Even Apple, which entered 2020 after making sharp gains, has shed 6% since the beginning of the year as production of iPhones in China has been slower to ramp up than expected.
The coronavirus outbreak has moved so fast that its impact has not yet shown up in any nationwide economic data. Many economists still think the U.S. can avoid a recession, particularly if the disease is under control by the early summer.
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But most also think the odds of recession have risen significantly in recent weeks. Measures of consumer sentiment have fallen sharply since the beginning of the year, a sign that consumers are likely to pull back on spending in the coming weeks.
Many analysts say financial markets will continue to swing sharply until the number of new infections stops accelerating. In the United States, the number of cases has topped 1,000. Worldwide, more than 119,000 people have been infected, and over 4,200 have died.
"There's a real feeling that we don't know where this ends," said Brad McMillan, chief investment officer for Commonwealth Financial Network.
Italy's government announced $28 billion in financial support for health care, the labor market and families and businesses that face a cash crunch due to the country's nationwide lock down on travel.
Trump hinted at plans for tax cuts and other economic relief late Monday, but he has yet to unveil any details. His proposal for a cut to payroll taxes has met resistance on Capitol Hill.
The government has to hit a narrow target to lift market optimism, all while overcoming partisan rancor to get there.
"The package must be large enough to restore confidence, but targeted enough to provide immediate relief to where it is needed most," Mike Ryan, UBS Global Wealth Management's Americas chief investment officer, wrote in a report.
The Dow Jones Industrial Average fell 1,464.94 points, or 5.9%, to 23,553.22, the S&P 500 fell 140.85, or 4.9%, to 2,741.38 and the Nasdaq lost 392.20, or 4.7%, to 7,952.05.
Even a climb in Treasury yields, which has been one of the loudest warning bells on Wall Street about the economic risks of the crisis, wasn't enough to turn stocks higher. The yield on the 10-year Treasury rose to 0.87% from 0.75% late Tuesday. That's a sign of diminished demand for safe investments.
Asian markets also fell, while European markets lost earlier gains following the rate cut by the Bank of England and turned lower.
For all the fear in the market and selling by huge institutions, many regular investors have been holding relatively steady.
"People, by and large, are keeping their heads right now," said JJ Kinahan, chief market strategist at TD Ameritrade.
Clients are mostly sticking to their long-term investment plans, he said, though some may want to adjust their portfolios if they feel uncomfortable with all the volatility. Still, the standard advice from most advisers is to focus more on long-term goals and pay less attention to short-term swings, which will likely dominate markets for some time.
"We're looking at a month of volatility as the coronavirus plays out," Kinahan said.
Stock prices generally move on two main factors: how much profit companies are earning and how much investors are willing to pay for each $1 of them. For the first part, Wall Street is slashing its expectations, which undercuts stock prices. For the second, all the coronavirus worries make investors less willing to pay high prices. Valuations were already above historical averages before the market's declines began.
Strategists at Goldman Sachs on Wednesday sharply cut their expectations for earnings growth this year, saying it will lead to the end of the bull market for the S&P 500, which began more than a decade ago.
A plunge in crude prices has wiped out profits for energy companies, while record-low Treasury yields are squeezing the financial sector. Strategists say S&P 500 earnings per share could fall enough to drag the index down to 2,450 in the middle of the year. That would be a nearly 28% drop from its record.
Goldman Sachs, though, also says it expects the drawdown to be short, with earnings rebounding later in the year as the pain from the coronavirus wanes. It says the S&P 500 could climb back to 3,200 by the end of the year.