A historic week for the stock market ended with a big, fat question: What will the government and the Federal Reserve do about the coronavirus outbreak that threatens to decimate the longest-running bull market on record?
The infectious disease, COVID-19, which reportedly originated in Wuhan, China, late last year, reached viral proportions this week on Wall Street — and literally throughout the world.
Cases of the illness have stabilized in China, but its spread outside the country, to nearly 60 countries in total, is what may have truly injected uneasiness into markets — see FactSet chart:
Approximately 84,000 cases have emerged, and almost 2,900 people have died, with several countries reporting their first incidences of COVID-19, including Brazil, Georgia, New Zealand and Norway. The U.S. on Saturday reported its first death, in Washington state.
In an opinion piece in the New England Journal of Medicine on Friday, Microsoft co-founder Bill Gates said the outbreak could be a once-in-a-century pandemic. “The data so far suggest that the virus has a case fatality risk around 1%; this rate would make it many times more severe than typical seasonal influenza, putting it somewhere between the 1957 influenza pandemic (0.6%) and the 1918 influenza pandemic (2%),” he wrote, adding that the Bill and Melinda Gates Foundation has committed substantial resources to prevent such diseases.
Those factors have, perhaps, sent risk assets into virtual free fall this week after mostly shaking off developments related to the virus since at the start of the year.
The structural damage to Wall Street’s bullish patina is undeniable, as the Dow Jones Industrial Average DJIA, -1.39% , the S&P 500 SPX, -0.82% and the Nasdaq Composite COMP, +0.01% booked their worst weekly declines since the 2008 financial crisis. All three stock gauges fell into correction territory with drops of at least 10% from recent peaks.
Those statistics don’t necessarily capture the severity and velocity of the move in stocks, which had only days before been putting in all-time highs. Indeed, the deterioration from the peak has been nothing short of breathtaking, highlighted by the S&P 500’s fastest slide from a record close to correction in history.
All totaled, global equity markets have wiped out $ 7 trillion from the levels of Feb. 19, when the S&P 500 notched its record, and the U.S. market alone has lost $ 4.3 trillion, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
More than 70% of the S&P 500 is now in correction territory or worse. By another measure, only two companies ended positive for the week among the entire S&P 500: Regeneron Pharmaceuticals REGN, +3.00% , up 10.3%, and the chip stock Qorvo Inc. QRVO, +6.10% , with a weekly gain of 2.4%.
Here are the top 10 worst performers in the S&P 500 from the week, according to Dow Jones Market Data:
| Company name | Week-to-date % change |
| American Airlines Group Inc. AAL, -7.52% | -31.52 |
| Flir Systems Inc. FLIR, -4.40% | -27.52 |
| Royal Caribbean Cruises Ltd. RCL, +4.43% | -24.22 |
| Lincoln National Corp. LNC, -4.90% | -24.06 |
| Alaska Air Group Inc. ALK, -4.72% | -22.88 |
| Devon Energy Corp. DVN, +3.64% | -22.56 |
| Occidental Petroleum Corp. OXY, +2.92% | -22.27 |
| Cimarex Energy Co. XEC, +7.83% | -22.22 |
| Unum Group UNM, -2.55% | -22.22 |
| MGM Resorts International MGM, -3.76% | -21.76 |
Additional rate cuts? Now?
Reports late Friday by the Washington Post suggested that the Trump administration may be discussing ways to avert further damage to the market and prevent a pronounced slowdown in the domestic economy. Proposals reportedly included fiscal measures like targeted tax cuts and other emergency actions.
President Trump, who CNBC reported has leaned this week on the Federal Reserve to intervene to help address the possible the fallout from the spread of coronavirus, did so more explicitly in a Saturday press conference, saying the Fed should be a leader rather than a follower in slashing target lending rates in response to the disease outbreak.
Trump, has frequently cited the stock markets as a proxy for the fiscal success of his administration and for the economy, opined that the markets “will all come back.”
Fed Chairman Jerome Powell at midday Friday delivered a rare unscheduled statement, saying that the virus posed an “evolving risk,” and reiterated that he was closely monitoring the outbreak, which market participants took as implying that the central bank might be ready to cut rates further from the current 1.50%-to-1.75% range. Markets are pricing in two Fed rates cuts for this year, with the 10-year Treasury TMUBMUSD10Y, +0.00% yield, which moves opposite to price, ending Friday at a record-low 1.127%.
One former Fed governor, Kevin Warsh, argued in an op-ed in the Wall Street Journal that the central bank should take “immediate action” and jointly cut interest rates.
Warsh was a candidate for the Fed chairmanship when Trump opted not to renew the term of Janet Yellen and selected Powell as her replacement. Warsh, Trump said subsequently, should have lobbied harder for the position.
Reuters also reported on Friday that global central banks may be inclined to kick off efforts, if not coordinated moves, to help stem the expected problems from the spread of the illness.
‘But at this stage, how much help can additional rate cuts really offer?’
What makes the epidemic unique for financial markets is that it has resulted in a rout driven by an event that is nonfinancial in nature and hard to incorporate into financial models.
How do you solve a problem like a virus?
Natural disasters have a sense of finality, and trade wars may eventually be resolved, but the coronavirus has the potential to deliver lasting disruption to supply chains. To think, the markets had been fretting a few short months ago about an unceasing tariff clash between China and the U.S.
“No matter how much the Fed cuts rates and stimulates consumer demand, it cannot eradicate the need for quarantine and travel barriers to arrest the spread of infection,” wrote Seema Shah, chief strategist at Principal Global Investors, in a Friday blog post.
It isn’t clear that the central bank can deliver the stimulus necessary to inoculate financial markets against fears of an infectious disease that could hinder growth and that has already dented China, the second largest economy in the world.
Reports out of Beijing on Saturday local time indicated that the country’s manufacturing activity for February fell to a record low. The official manufacturing purchasing managers’ index tumbled to 35.7 from 50 last month. Any reading below 50 signals contracting conditions. A separate reading on services also fell to record low, hitting 29.6 compared with 54.1 in January.
“Movement and activity is restricted in China, and China is at the center of many critical global supply chains,” wrote Katie Nixon, chief investment officer at Northern Trust Wealth Management, in a Friday research note before the data were released.
Read: Coronavirus will deliver a ‘supply shock’ that central bankers can’t fix
“Research suggests that even today about two-thirds of factories in China are still not operating properly, lacking supplies and labor,” she said.
Ultimately, the “most immediate impact of the growing spread of the coronavirus is on sentiment: People are fearful,” she said.
But it is the economic impact that investors are struggling to calculate. However, it is difficult to forecast for an epidemic that may hamstring developed economies for an undefined period. Morgan Stanley analysts on Friday speculated that three scenarios could play out for the epidemic and markets:
- . Containment by March: The virus outbreak is contained by March’s end, and production activity in China normalizes around mid to late March, limiting the disruption to the first quarter of this year. Global growth dips to an annualized 2.5% in the first quarter (from 2.9% in the fourth quarter of 2019), but recovers meaningfully from the second quarter on.
- . Escalation in new geographies: Disruption extends into the second quarter, as new cases continue to rise in other parts of the world, before peaking by May’s end. Global growth averages just an annualized 2.4% in the year’s first half but picks up from the third quarter on.
- . Persisting into the third quarter: Escalating recession risk. The virus continues to spread into the third quarter, encompassing all the large economies. China faces a renewed rise in new cases as it restarts production. Disruption continues into the third quarter. Global growth stays weak between the first and third quarters. Extended disruption brings the risk of damage to corporate profitability and a rise in corporate credit risks.
Already pre-emptive restrictions on travel are taking place in the U.S. Indeed, a number of corporations are advising employees to defer and limit certain types of travel both professionally and personally.
Wall Street Journal: How to prepare for the coronavirus
Central banks cannot, some strategists and economists argue, cure economies that are slowing due to a viral outbreak.
“It surely won’t take too much more negative economic data and infection news to prompt the Fed to deliver the rate cut the market is pleading for. But at this stage, how much help can additional rate cuts really offer?” Shah wondered.
That may explain why Powell’s comments on Friday offered only cold comfort for investors rattled by the epidemic and their inability to predict.
The result is that this downturn may be more than just a garden-variety correction and could possibly be a downturn that could send stocks into a bear market, ending a lengthy bull run that is in its 12th year, some analysts forecast. That’s hard to fathom with a jobs market that has been outstanding and other parts of the economy that have been humming along.
However, the recent slide in markets has tightened financial conditions by one measure, according to Oxford Economics, which shows that one indicator of stress in the market is at its highest level since before Powell and company embarked upon a series of three quarter-percentage-point rate cuts in 2019:
MarketWatch’s Joy Wiltermuth reported that cracks are, indeed, beginning to form, with speculative-grade debt, or “junk bonds,” seeing credit spreads gap out by 100 basis points. Debt widening out is an indication of souring sentiment and rising costs in a key area of funding for corporations. Energy bonds have taken the brunt of the pain as crude-oil prices CL00, +1.12% have been one of the main casualties of the coronavirus outbreak because investors fear that the demand for crude could be hurt by the epidemic.
Oxford Economics forecasts that the U.S. economic expansion will be hurt if the coronavirus is classified as a pandemic by the World Health Organization.
The firm’s baseline estimate will feature 2020 GDP growth in the U.S. of around 1.4% and after first-quarter growth flirting with zero. “The second quarter is also likely to remain lackluster at 1.3%,” wrote senior U.S. economist at Lydia Boussour — see chart:
“Factoring [in] the possibility of a coronavirus lockdown in the U.S., we believe risks are heavily skewed to the downside,” she wrote.
Volatility’s rise
Markets were certainly trading as if risks were skewed lower. Investors said that the action was characteristic of a market that is selling off, with so-called safe-haven assets like gold dumped indiscriminately alongside stocks.
One reason for the trading action has been compliance officers tightening the reins on trading shops and forcing investors to adopt more neutral positions, neither long nor short, as the selling intensified in the week’s latter half and altered the balance of investor portfolios.
“I think we’ve gone from de-risking to de-grossing,” Peter Tchir, head of macro strategy at Academy Securities, told MarketWatch at midday on Friday. “People are being told to reduce their position sizes: ‘Let’s just cut the long and the shorts,’ ” he explained.
Some of that action may explain why gold GCJ20, +1.31% was driven to its worst daily loss in seven years even as the stock market, which usually moves in the opposite direction of bullion, notched its worst week in 12 years. Investors also may have been forced to sell gold, which already had a powerful run-up before this selloff, to meet margin calls, some strategists speculated.
Breakdowns in such correlations, Tchir said, are a signature feature of a market that is unwinding in a spectacular fashion. That includes previously beaten-down stocks like travel services and even cruise operators, including TripAdvisor Inc. TRIP, +3.21% , Booking Holdings Inc. BKNG, +2.16% , Royal Caribbean Cruises Ltd. RCL, +4.43% , Norwegian Cruise Line Holdings Ltd. NCLH, +7.25% and Royal Caribbean Cruises Ltd. RCL, +4.43% , which rose when they ought not to in an outbreak scenario.
The curious movements also came with a spike in volatility, with the Cboe Volatility Index VIX, +2.43% , a gauge of expected volatility, jumping to 40.11, its loftiest close since August 2015, according to FactSet data.
In intraday terms, the Nasdaq Composite, which finished Friday’s trading session just a hair into positive territory, for example, had been down by as much as 3.5% earlier in the session until undertaking its sharpest reversal since 2008, according to Dow Jones Market Data.
The stunning moves likely suggest that market may be nearing a so-called bottom — or simply unable to find purchase in this environment. But where things stand is anyone’s guess.
Traders said that the bulk of trading hasn’t felt panicky but noted that volatility born of a virus outbreak is a different variable for investors to compute.
When will things level out?
Jason Katz, a UBS managing director and senior portfolio manager, may have put it best: “We don’t need a rate cut; we need a vaccine,” he said on CNBC. “And the only cure [for the markets] is time.”
Katz said he was advising his clients to use the weekend to “take a deep breath” and said that corrections are par for the course even if this week felt less than normal.
That may turn out to be sage advice, even if, for some, that deep breath might be through an N95 respirator mask.
Check out the CNBC video below:
Week ahead
Here’s how the week ahead looks, with, aside from coronavirus-related developments, the Friday jobs report likely the most important data point:
