Stocks closed at all-time highs on February 19 as investors ignored warnings of an escalating coronavirus epidemic and cheered on the record-long bull market.
By February 28, the S&P 500 had just closed out its worst week since the 2008 financial crisis. Equities sat deep in correction territory with few signs of near-term recovery, and economists remained flummoxed by uncertainty surrounding the virus’s economic impact.
The outsized selling began Monday, when markets were first able to react to spiking virus-related death tolls in Iran, Italy, and South Korea. The fatalities erased chances of the outbreak remaining mostly contained in China, and sparked new fears that the outbreak could become a pandemic.
Government officials and central bank leaders discussed the outbreak during a Group of 20 meeting in Riyadh, warning the virus posed an increasingly serious threat to economic growth. The International Monetary Fund slashed its growth expectation for China the same weekend.
Monday’s session saw the S&P 500 fall the most since 2018, prompting discussion around whether markets had underestimated coronavirus’s impact. As cases and deaths rose through Tuesday, markets extended their slump and analysts issued fresh downgrades on global growth projections. By market close, the S&P 500 and the Dow Jones industrial average had wiped out their year-to-date gains.
Stocks posted a weak morning rebound on Wednesday after various calls to „buy low“ amid boosted volatility. Yet equities turned red later in the day as the „dead cat bounce“ failed to cheer Wall Street.
Thursday saw the most intense selling of the week investors digested a new warning from the Centers for Disease Control. The public health agency warned on Wednesday afternoon that Americans should prepare for the outbreak to spread within the US.
A California patient had contracted coronavirus without traveling to exposed areas or making contact with infected individuals, the CDC reported. US indexes entered correction territory – defined as a 10% drop from a record high – for the first time since December 2018.
The following day brought little reprieve. The Dow slumped as many as 1,000 points for the third time that week, and the S&P 500 closed at levels not seen since October.
Investors have several red flags to mull over before trading resumes on March 2. The S&P 500’s tumble marked its quickest correction since the Great Depression, revealing the intensity with which cash exited stocks for safer vehicles. Those seeking safe havens flooded the US bond market, pushing the 10-year Treasury yield to new lows day-after-day during the frenetic sell-offs.
Oil plummeted further into a bear market on Friday and even slid below $50 per barrel, suggesting the virus could drag on global demand for the critical commodity. Traders with bets on the broad US stock market pulled cash out of the SPY exchange-traded fund at the fastest pace in two years.
Read more: These are the 3 best trades to help protect investors from coronavirus turmoil, UBS says
Despite the late-February bloodbath, Wall Street’s top economists expect there’s more market turmoil to come. Goldman Sachs analysts warned on Thursday that US firms would fail to generate any profit growth in 2020 as coronavirus cripples supply chains, weakens demand, and tears into Chinese economic activity.
The outbreak’s fallout on the world economy could be the worst since the financial crisis, strategists at Bank of America said. If the outbreak continues to spread and countermeasures fail, the S&P 500 can sink 20% below its 19 high and bring an end to the stock market’s 12 years of bullishness, RBC Capital Markets estimated.
Much of the virus’s trajectory and economic impact remains uncertain, leaving investors around the world with little guidance on how to best safeguard their wealth.
Here are three reasons why coronavirus’s stranglehold on world markets may continue for weeks to come:
The White House can’t talk its way out of this
Foto: Source: REUTERS/Carlos Barria
After Tuesday revealed the market’s dip wouldn’t be confined to a single day, White House National Economic Council Director Larry Kudlow appeared on CNBC to reassure investors monitoring the outbreak with growing concern. He claimed the US had contained the coronavirus and avoided „economic tragedy.“
At the same time, Health and Human Services Secretary Alex Azar took a more sobering tone while testifying to Congress. No practices can „hermetically seal off the United States to a virus, and we need to be realistic about that,“ Azar said.
The conflicting statements kicked off an attempt within the White House to minimize the economic threat posed by the outbreak. The Washington Post reported on Wednesday that Trump was „furious“ about the market’s violent decline.
The president has repeatedly pointed to the surging market as a sign of his success in lifting the US economy. Yet the virus-fueled sell-off undermined that argument and left the administration scrambling to stabilize the downturn.
The White House has since blamed Democratic presidential candidates and the media for the plunging market, alleging „a political effort“ to „distract and disturb the American people with fearful rhetoric and palace intrigue.“ At the same time, the CDC has split with the administration and issued dire warnings of how the virus will affect Americans.
Public health officials raised concerns throughout the week, deeming the virus’s spreading within the US „inevitable“ and that a national outbreak could drive „severe“ disruption to day-to-day activity.
„It’s not a question of if this will happen, but when this will happen, and how many people in this country will have severe illnesses,“ Dr. Nancy Messonnier, director of the National Center for Immunization and Respiratory Diseases, told reporters in a conference call.
By the end of the week, the virus has only further gripped the nation. The number of confirmed cases ballooned to 62, and the unexplained case in California raises the odds of the infection rate accelerating.
The White House’s attempts to ease fears and claim containment are „problematic“ and send „inaccurate risk messaging“ to the American people, Jeremy Konyndyk, a senior fellow at the Center for Global Development, told Business Insider.
The Federal Reserve is powerless to stop the sell-off
Foto: Source: Alex Wong/Getty
US markets are now pricing in two rate cuts from the Federal Reserve as investors expect the central bank to counteract economic fallout with fresh stimulus.
A trio of rate cuts helped drive the S&P 500’s 29% gain in 2019. While early expectations called for a pause to adjustments this year, the virus’s threat to global growth could bring lower rates sooner than expected.
Increased bets on central bank stimulus typically thrill the investment community, but the murkiness surrounding coronavirus suggests traditional easing might not achieve the intended effect. Rate cuts typically boost consumer spending and demand, yet Seema Shah, chief investment strategist at Principal Global Investors, sees the virus primarily harming supply.
The outbreak has already roiled production lines in China, prompting industry giants including Apple, Microsoft, and Coca-Cola to warn of hits to their manufacturing efforts. The market realized over the past week that rate cuts won’t „insulate it against supply-side concerns“ and eliminate heightened market volatility, Shah said in an emailed statement.
„While further Fed cuts, and potentially an ECB cut, may be priced in, easier liquidity conditions may be insufficient to prop up equity markets if coronavirus concerns continue to escalate,“ she wrote. „Monetary policy is not optimized for addressing a shock such as this.“
Interest rate cuts could even do more harm to markets than good. Slashing the benchmark interest rate could strengthen concerns of the virus’s toll on the economy, Scott Minerd, chief investment officer at Guggenheim Partners, said on Bloomberg TV.
The Fed would want to „try to avoid sending a signal that stirs further fears“ if it cuts rates, he added.
We still don’t know the extent of the damage
Foto: Source: STR/AFP via Getty Images
Even as various experts model how the virus will hammer stocks, past projections turned irrelevant as the outbreak developed in ways never seen before. Initial estimates used 2003’s SARS outbreak to contextualize coronavirus’s blow to economies, but other analysts quickly rebuked such associations.
Increased globalization, latent trade tensions, and stronger economic fundamentals compared to the 2000s set coronavirus up to effect economies differently than past epidemics, RBC Capital Markets analyst Tom Porcelli said in a late January note.
„Looking to the SARS epidemic for guidance is, in our view, amongst the most misguided approaches,“ he added.
Wall Street firms updated their outlooks throughout the week as the sell-off continued. Previous „bear case scenarios“ now resemble analysts‘ updated „base case“ projections, and economists warned that, should the outbreak intensify, additional downgrades would soon follow.
Not all virus news through the end of February painted a bleak future for afflicted countries. China, where the virus is primarily concentrated, has seen its infection rate slow after strict quarantine orders and factory closures. Economists are now monitoring other nations with sizable outbreaks to see whether they mimic China’s epidemic or swiftly fade away.
Even the Fed hinted at coronavirus’s highly unpredictable nature. The central bank will „act as appropriate to support the economy“ and is open to rate cuts to stymie economic harm, Fed chair Jerome Powell said in a Friday statement.
„The coronavirus poses evolving risks to economic activity,“ Powell added.
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