Seven sessions, seven losses. On Friday the S&P 500 slid by more than 3.5%, leaving it 15% under its record and pushing the global wipeout to $5 trillion.
The week had already gone badly. The Dow Jones Industrial Average gave up more than 4,000 points between Monday and Friday, and shares worldwide were on course for a weekly loss of around 10%, their worst stretch since the 2008 crisis. Thursday brought a 4.4 percent plunge in the S&P 500. American stocks had not seen a worse day since 2011. Benchmarks in many countries fell into a correction, meaning a decline of 10 percent or more, within a few days.
Money runs for cover
Investors headed for safety. Treasury yields dropped to record lows, with the two-year note falling through 1% and 30-year rates sitting under 1.7%. The yen was headed for its biggest weekly gain since mid-2016. Gold, which had rallied for months, lost 2%. Crude oil slipped toward $45 a barrel. European shares were approaching their August lows, and Asian equities shed more than 3%.
The cause was the spreading coronavirus, or more exactly, what governments might do about it. Traders feared that containment measures would cut into corporate profits and growth. The selling accelerated after a White House official suggested some schools might have to close and more companies cautioned that disruption could upset their sales and profit forecasts.
New cases, new restrictions
News from abroad added to the strain. Germany placed about 1,000 people in quarantine. Switzerland barred large events, and that meant the Geneva car show would not go ahead. Iran and South Korea disclosed further infections, and Mexico and Nigeria, Africa’s most populous country, recorded their first cases. New Zealand also reported its first case, and its dollar dropped 1% as investors wagered the central bank would ease policy.
Hopes that an epidemic that began in China late last year would burn out within months had faded as international cases multiplied. “Investors are trying to price in the worst-case scenario and the biggest risk is what happens now in the United States and other major countries outside of Asia,” said John Lau, head of Asian equities at SEI Investments. “These are highly uncertain times, no one really knows the answer and the markets are really panicking.”
Keith Lerner, chief market strategist at SunTrust, described the mood in a client note. “Investors are selling stocks first and asking questions later,” he wrote, adding that there were signs of “pure liquidation.” He did not expect the US to escape the damage, but he argued it was “premature to suggest the base case for the US economy is recession.”
Forecasts cut, rate cuts priced in
Forecasters were revising down. Money markets were now pricing three Federal Reserve rate cuts this year, and Bank of America predicted the global economy would have its weakest year since the financial crisis because the virus was damaging demand in China and elsewhere. Citigroup said it wanted to see markets “closer to panic” before committing fully to global equities, so the dip buyers who had carried the longest bull market on record were absent.
James McCormick, global head of desk strategy at NatWest Markets, pointed to the gap between asset prices and growth over the past year. He said the escalation of COVID-19 risked turning a virtuous cycle into a vicious one, and that with growth estimates heading lower he expected “more downside.”
A possible outbreak in the United States posed a particular test for President Trump, whose political standing has leaned heavily on the economy and a rising stock market.
