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US Stock Market Falls Into Correction 02/27 16:09
The Dow Jones Industrial Average sank nearly 1,200 points Thursday,
deepening a weeklong global market rout caused by worries that the coronavirus
outbreak will wreak havoc on the global economy.
(AP) -- The Dow Jones Industrial Average sank nearly 1,200 points Thursday,
deepening a weeklong global market rout caused by worries that the coronavirus
outbreak will wreak havoc on the global economy.
The S&P 500 has now plunged 12% from the all-time high it set just a week
ago. That puts the index in what market watchers call a "correction," which
analysts have said was long overdue in this bull market, which is the longest
in history.
It was the worst one-day drop for the market since 2011, and stocks are now
headed for their worst week since October 2008, during the global financial
crisis.
The losses extended a slide in stocks that has wiped out the solid gains
major indexes posted early this year. Investors came into 2020 feeling
confident that the Federal Reserve would keep interest rates at low levels and
the U.S.-China trade war posed less of a threat to company profits after the
two sides reached a preliminary agreement in January. The virus outbreak has
upended that rosy scenario as economists lower their expectations for economic
growth and companies warn of a hit to their business.
"This is a market that's being driven completely by fear," said Elaine
Stokes, portfolio manager at Loomis Sayles, with market movements following the
classic characteristics of a fear trade: stocks are down, commodities are down
and bonds are up.
Bond prices soared again, sending the yield on the 10-year Treasury to
another record low. When yields fall it's a sign that investors are feeling
less confident about the strength of the economy going forward.
More and more companies are warning that the outbreak will hurt their
profits. Microsoft warned that the outbreak had interrupted its supply lines,
following a similar warning last week from Apple. Crocs also fell sharply after
saying its results would be hurt.
Energy stocks fell sharply as the price of oil dropped 3.4%.
Stokes said the swoon reminded her of the market's reaction following the
Sept. 11, 2001 terrorist attacks.
"Eventually we're going to get to a place where this fear, it's something
that we get used to living with, the same way we got used to living with the
threat of living with terrorism," she said. "But right now, people don't know
how or when we're going to get there, and what people do in that situation is
to retrench."
The virus has now infected more than 82,000 people globally and is worrying
governments with its rapid spread beyond the epicenter of China.
Japan will close schools nationwide to help control the spread of the new
virus. Saudi Arabia banned foreign pilgrims from entering the kingdom to visit
Islam's holiest sites. Italy has become the center of the outbreak in Europe,
with the spread threatening the financial and industrial centers of that nation.
At their heart, stock prices rise and fall with the profits that companies
make. And Wall Street's expectations for profit growth are sliding away. Apple
and Microsoft, two of the world's biggest companies, have already said their
sales this quarter will feel the economic effects of the virus.
Goldman Sachs on Thursday said earnings for companies in the S&P 500 index
might not grow at all this year, after predicting earlier that they would grow
5.5%. Strategist David Kostin also cut his growth forecast for earnings next
year.
Besides a sharply weaker Chinese economy in the first quarter of this year,
he sees lower demand for U.S. exporters, disruptions to supply chains and
general uncertainty eating away at earnings growth.
Such cuts are even more impactful now because stocks are already trading at
high levels relative to their earnings, raising the risk. Before the virus
worries exploded, investors had been pushing stocks higher on expectations that
strong profit growth was set to resume for companies.
The S&P 500 was recently trading at its most expensive level, relative to
its expected earnings per share, since the dot-com bubble was deflating in
2002, according to FactSet. If profit growth doesn't ramp up this year, that
makes a highly priced stock market even more vulnerable.
Goldman Sach's Kostin said the S&P 500 could fall to 2,900 in the near term,
which would be a nearly 7% drop from Wednesday's close, before rebounding to
3,400 by the end of the year.
Traders are growing increasingly certain that the Federal Reserve will be
forced to cut interest rates to protect the economy, and soon. They're pricing
in a nearly two-in-three probability of a cut at the Fed's next meeting in
March. Just a day before, they were calling for only a one-in-three chance,
according to CME Group.
A handful of companies have managed to gain ground in the latest rout of
stocks. Medical teleconferencing company Teladoc surged 15.7% and 3M, which
counts surgical masks among its many products, rose 0.8%.
The market's sharp drop this week partly reflects increasing fears among
many economists that the U.S. and global economies could take a bigger hit from
the coronavirus than they previously thought.
Earlier assumptions that the impact would largely be contained in China and
would temporarily disrupt manufacturing supply chains have been overtaken by
concerns that as the virus spreads, more people in numerous countries will stay
home, either voluntarily or under quarantine. Vacations could be canceled,
restaurant meals skipped, and fewer shopping trips taken.
"A global recession is likely if COVID-19 becomes a pandemic, and the odds
of that are uncomfortably high and rising with infections surging in Italy and
Korea," said Mark Zandi, chief economist at Moody's Analytics.
The market rout will also likely weaken Americans' confidence in the
economy, analysts say, even among those who don't own shares. Such volatility
can worry people about their own companies and job security. In addition,
Americans that do own stocks feel less wealthy. Both of those trends can
combine to discourage consumer spending and slow growth.
MARKET ROUNDUP:
The S&P 500 fell 137.63 points, or 4.4%, to 2,978.76. The Dow fell 1,190.95
points, or 4.4%, to 25,766.64. The Nasdaq dropped 414.29 points, or 4.6%, to
8,566.48. The Russell 2000 index of smaller company stocks lost 54.89 points,
or 3.5%, to 1,497.87.
In commodities trading Thursday, benchmark crude oil fell $1.64 to settle at
$47.09 a barrel. Brent crude oil, the international standard, dropped $1.25 to
close at $52.18 a barrel. Wholesale gasoline fell 4 cents to $1.41 per gallon.
Heating oil declined 1 cent to $1.49 per gallon. Natural gas fell 7 cents to
$1.75 per 1,000 cubic feet.
Gold fell 40 cents to $1,640.00 per ounce, silver fell 18 cents to $17.66
per ounce and copper fell 1 cent to $2.57 per pound.
The dollar fell to 109.95 Japanese yen from 110.22 yen on Wednesday. The
euro strengthened to $1.0987 from $1.0897.
(CZ)
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