Dow tanks nearly 1,200 pts over virus anxiety, biggest 1-day drop since 2011

Worldwide markets have plummeted again, deepening a weeklong rout triggered by growing anxiety that the coronavirus will wreak havoc on the global economy. The sweeping selloff pushed the benchmark S&P 500 down 4.4 per cent, its worst one-day drop since 2011.

The Dow Jones Industrial Average tumbled nearly 1,200 points. The S&P 500 has now plunged 12 per cent from the all-time high it set just a week ago. That puts the index in what market watchers call a "correction," which some analysts have said was long overdue in this bull market, the longest in history.

Stocks are now headed for their worst week since October 2008, during the global financial crisis.

The losses extended a slide 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 US-China trade war posed less of a threat to company profits after the two sides reached a preliminary agreement in January. Even in the early days of the outbreak, markets took things in stride.

But over the past two weeks, a growing list of major companies issued warnings that profits could suffer as factory shutdowns across China disrupt supply chains and consumers there refrain from shopping.

Travel to and from China is severely restricted, and shares of airlines, hotels and cruise operators have been punished in stock markets. As the virus spread beyond China, markets feared the economic issues in China could escalate globally.

One sign of that is the big decline in oil prices, which slumped on expectations that demand will tail off sharply.

"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.

The Dow dropped 1,190.95 points, its largest one-day point drop in history, bringing its loss for the week to 3,225.77 points, or 11.1 per cent. To put that in perspective, the Dow's 508-point loss on October 19, 1987, was equal to 22.6 per cent.

Bond prices soared again Thursday as investors fled to safe investments. The yield on the benchmark 10-year Treasury note fell as low as 1.246 per cent, a record low, according to TradeWeb. When yields fall, it's a sign that investors are feeling less confident about the strength of the economy.

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 per cent. 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 US 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 after declining for most of 2019.

The S&P 500 recently traded 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 predicted the S&P 500 could fall to 2,900 in the near term, which would be a nearly 7 per cent 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 are pricing in a 96 per cent probability of a cut at the Fed's next meeting in March. Just a day before, they were calling for only a 33 perc ent chance, according to CME Group.