U.S. Stocks Plunge as Coronavirus Crisis Spreads

Investors in the United States have mostly shrugged off the effect of the coronavirus ravaging China. That changed on Monday, when news of the outbreak’s spread drove them to sell stocks — at a furious pace.

The S&P 500 index, which had reached a record high as recently as Wednesday, fell 3.4%, its worst single-day performance since February 2018. As analysts issued new warnings that the outbreak could drag down economies around the globe, stocks fell enough to wipe out all of the index’s gains for 2020.

It was a turbulent day for stocks worldwide: European markets recorded their worst session since 2016, and major bench marks in Asia also closed down.

“There was a cavalier attitude about the virus,” said Bruce Bittles, chief investment strategist at Baird, an investment banking and money-management firm. With the threats appearing to increase, he added, “you have to think about the global economy slipping enough to cause a shortfall in earnings.”

On Monday, fears were rising that the outbreak could spread further into Asia and Europe.

Italy reported it had 219 cases and locked down 11 towns, restricting the movements of 50,000 people. Police and military forces were deployed to ensure that only people with special permission left or entered towns covered by the order. Officials in Lyon, France, stopped a bus from Milan on Monday and confined the passengers inside over suspicions of a case onboard, the newspaper Le Parisien reported.

South Korea, a major industrial center, reported 231 new cases a day after its government said it was prepared to use emergency powers if necessary. And state-owned media in Iran reported that the virus had killed 12 people there — the highest death toll outside China.

In the United States, the Centers for Disease Control and Prevention said there were 53 people infected with the virus, up from 34 on Friday. Nearly all the new infections involve former passengers on the Diamond Princess cruise ship docked in Japan, who have been quarantined on military bases in California and Texas. British officials announced that four passengers who had been in quarantine since returning to the country were infected, raising that country’s number of cases to 13.

Not all the news was bad. China may be getting the outbreak under control, the World Health Organization said. Health officials said the daily tally of new infections had been declining since Feb. 2 because of the lockdown around Wuhan, the city at the center of the outbreak. The Chinese government and businesses have begun chartering trains, buses and airplanes to retrieve workers who were stranded by travel restrictions put in place during the Lunar New Year holiday.

“We’re encouraged by the continued decline in cases in China,” said Dr. Tedros Adhanom Ghebreyesus, the organization’s director general. Still, he cautioned that the outbreak could worsen.

“Does this virus have pandemic potential?” he said. “Absolutely it has.”

New pessimistic forecasts about the economy began to emerge last week.

In a note published Friday, economists at JPMorgan Chase wrote that they expected global growth to slow to a 1% annual pace in the first quarter, which would be the weakest quarter of the economic expansion that began after the deep recession that started 12 years ago.

In the United States, the consensus estimate for first-quarter domestic growth has slipped to 1.5%, according to data from FactSet on Monday, from 1.7% at the end of 2019. Economists at Goldman Sachs, who were expecting first-quarter domestic growth of 2% as recently as late January, have been steadily lowering their estimate, which fell to 1.2% on Sunday. “The risks are clearly skewed to the downside until the outbreak is contained,” they wrote.

Airline and technology stocks were particularly hard hit on Monday. Delta Air Lines shares fell 6.3% and American Airlines slid 8.5%, while Apple stock fell 4.8%. The tech-heavy Nasdaq composite index dropped 3.7%.

The sell-off continued in Asia on Tuesday morning, starting in Japan: The Nikkei 225 fell about 4% after the start of trading in Tokyo.

Oil prices dropped, with a barrel of West Texas Intermediate crude slipping nearly 4% to roughly $51, a result of the reduced demand from idled factories and restricted travel.

Investors rushed to safety: Gold — viewed as a haven during market tumult — rose to a seven-year high. It is up nearly 10% since the start of 2020.

And money poured into government bonds, pushing down bond yields, which move in the opposite direction of prices. The yield on the 10-year Treasury note fell to 1.37%, near the record low closing of 1.36%, a level touched back in July 2016. The yield on the 30-year bond is already in record-low territory at 1.83%.

Falling yields can buttress the stock market if they reflect increased expectations for Federal Reserve rate cuts. But a similar decline might also be bad news if it is a result of broad-based expectations that growth will weaken. The difference between the two is a matter of interpretation. But the sharp decline in recent days seems to have pushed investors toward the latter view.

“It’s that shift in the narrative that is forcing equity investors to have to wake up from the complacent stupor that they’ve been in,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.

Officials at the Federal Reserve and within the Trump administration are watching the situation closely, although the central bank’s main tool for stoking growth — lowering interest rates — might not help much if factories are not producing goods and supply chains are disrupted by quarantines.

Central bank officials have been clear that they did not expect to cut interest rates again unless rising risks upend their outlook for stable growth. So far, they have cautiously suggested there was no need to sound any alarms.

But that was before the spike in infections outside China over the weekend.

“The odds of Fed cuts are growing a lot,” Roberto Perli at Cornerstone Macro wrote in a note Monday. “But we need to understand that monetary policy is not well equipped to help in the situation we are facing.” Like the Fed, the White House has been cautious in declaring the disease a major source of concern. Tomas Philipson, acting chairman of the White House Council of Economic Advisers, said at the National Association for Business Economists conference in Washington that it was too early to tell how significant the effects of the virus will be.

“We don’t know yet, we’re sort of taking a wait-and-see approach,” he said, also noting that the scale of the seasonal influenza is much more significant and that “in terms of the public health impact on the economy, I think that’s been exaggerated.”