Stocks lost more than 6% on Wall Street Monday as huge swaths of the economy come closer to shutting down due to the coronavirus outbreak, from airlines to restaurants. Emergency actions taken by the Federal Reserve late Sunday to prop up the economy and get financial markets running smoothly again may have raised fears even further, some investors said.
The selling began immediately on Wall Street, and losses were sharp enough at the open to trigger a temporary trading halt for the third time in the last two weeks. The losses had been even steeper earlier in the morning, and they spread around the world. European stocks and crude oil were down 5% or more. The world’s brightest spot may have been Japan, where the central bank announced more stimulus for the economy, and stocks still lost 2.5%.
The spreading coronavirus is causing businesses around the world to shut their doors. While that can slow the spread of the virus, it’s also taking cash out of the pockets of businesses and workers. That has economists slashing their expectations for upcoming months, and JPMorgan Chase says the U.S. economy may shrink at a 2% annual rate this quarter and 3% in the April-through-June quarter. To many investors, that meets the definition of a recession, and the question is how long it will last.
The best-case scenario for many investors is that the economic shock will be steep but short, with growth recovering later this year after businesses reopen. Pessimists, though, are preparing for a longer haul.
Strategists at Goldman Sachs say the S&P 500 could drop as low as 2,000 in the middle of the year, which would be a 41% drop from its record set just a month ago. Goldman expects the index to rally back to 3,200 at year end.
American Airlines and United Airlines both announced steep cutbacks to flights over the weekend as customers cancel trips and the U.S. government restricts travel. Other travel companies have also seen sharp drops in demand from customers. Restaurants, movie theaters and other businesses that depend on drawing crowds appear to be next to get squeezed. Several states and the country’s largest city are ordering restaurants to close their doors to dine-in customers and do only takeout and delivery.
The Federal Reserve has been trying to do what it can to help the economy, and over the weekend it slashed short-term interest rates back to their record low of nearly zero.
It also said it also will buy at least $500 billion of Treasury securities and $200 billion of mortgage-backed securities to help calm the Treasury market, which is a bedrock for the world’s financial system and influences stock and bond prices around the world. Trading in the market began to get snarled last week, with traders saying they saw disconcertingly large gaps in prices offered by buyers and sellers.
“Despite whipping out the big guns,” the Fed’s action is “falling short of being the decisive backstop for markets,” said Vishnu Varathan of Mizuho Bank in a report. “Markets might have perceived the Fed’s response as panic, feeding into its own fears.”
The yield on the 10-year Treasury slid to 0.83% from 0.95% late Friday, a sign that investors are flocking into investments seen as safe.
The Fed action came as major economies expanded travel curbs and closed more public facilities, raising the cost of efforts to contain the outbreak that has infected nearly 170,000 people worldwide. China, where the coronavirus emerged in December, accounts for about half of those, but a dozen other countries have more than 1,000 cases each.
Japan’s central bank similarly expanded asset purchases to inject money into the economy and promised no-interest loans to help companies cope with the crisis. The measures came on top of announcements from other major central banks, including the European Central Bank and the Bank of England last week.
The S&P 500 fell 6.2%, as of 11:15 a.m. Eastern time. It had been down as much as 11.4% earlier in the morning, and it has lost about 25% since setting its record Feb. 19.
The Dow Jones industrial average lost 1,440 points, or 6.2%, to 21,757, and the NASDAQ was down 6.5%.
After the Fed unloaded its bazooka on markets late Sunday, investors are looking for more help from the U.S. government, according to Brian Nick, chief investment strategist at Nuveen. That includes targeted aid to industries hit hard by the virus, as well as checks sent out to households.
Volatility appears to be the new normal following a dizzying week in which the Dow twice fell by more than 2,000 points and also record its biggest point gain ever—1,985 points on Friday. Last week’s drops also confirmed the end of the longest-ever bull market on Wall Street, which emerged from the financial crisis and ran for nearly 11 years.
For most people, the coronavirus causes only mild or moderate symptoms, such as fever and cough, and those with mild illness recover in about two weeks. But severe illness including pneumonia can occur, especially in the elderly and people with existing health problems, and recovery could take six weeks in such cases.
Many investors expect markets to remain volatile as long as the number of new infections keeps accelerating.