Dow drops 7.8 percent as free-fall in oil, virus fears slam markets
Updated: 3:10 p.m. | Posted: 6:03 a.m.
Stocks went into a steep slide Monday on Wall Street as a combination of coronavirus fears and a crash in oil prices spread alarm through the market, triggering the first automatic halt in trading in over two decades to let investors catch their breath.
The Dow Jones Industrial Average sank 7.8 percent, its steepest drop since the financial crisis of 2008, as a free-fall in oil prices and worsening fears of fallout from the spreading coronavirus outbreak seize markets.
The sharp drops triggered the first automatic halts in trading in two decades. The price of oil plunged nearly 25 percent after Saudi Arabia indicated it would ramp up production after Russia refused to production cutbacks in response to falling demand.
U.S. stocks are now down 19 percent from the peak they reached last month. Bond yields plumbed new lows as investors sought safety.
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European markets entered a bear market, closing the day with their heaviest losses since the darkest days of the 2008 meltdown. Italy's index plunged 11.2 percent. Britain, France and Germany were down between 7.3 percent and 8.4 percent.
Yields on U.S. Treasury bonds plunged to more record lows as investors kept on sinking money into seemingly safer places, even as the return on their investment sank closer and closer to nothing.
On Wall Street, the S&P 500 plunged 7.4 percent in the first few minutes after the opening bell before trading was halted by the market's circuit breakers, first adopted after the crash of October 1987 and modified over the years. After the 15-minute pause, stocks trimmed their losses but were still down 5.7% in the early afternoon.
The Dow Jones Industrial Average lost 1,593 points, or 6.2 percent, to 24,275 after briefly being down more than 2,000. The Nasdaq gave up 5.1 percent.
The market-wide circuit breakers have been triggered only once before, in 1997.
The carnage in the energy sector was particularly arresting. Marathon Oil, Apache Corp. and Diamondback Energy each sank more than 40%. Exxon Mobil and Chevron were on track for their worst days since 2008.
“We knew it was going to be a hot day,” said John Spensieri, head of U.S. equity trading at Stifel. He said that the mood was “organized chaos” in the morning but that the trading halt achieved what it was supposed to by stopping the slide.
The coronavirus has infected more than 110,000 people worldwide and killed around 3,900, leading to factory shutdowns, travel bans, closings of schools and stores, and cancellations of conventions and other gatherings.
While the crisis has eased in China, where the virus was first detected, fast-growing clusters have turned up in South Korea, Iran and Italy, and fears are mounting in the United States, where a giant cruise ship idling off the California coast with at least 21 infected people aboard was scheduled to dock in Oakland on Monday so that the thousands on the vessel could be whisked to U.S. military bases or their home countries for a 14-day quarantine.
After initially taking an optimistic view on the virus — hoping that it would remain mostly in China and cause just a short-term disruption — investors are realizing they probably underestimated the crisis badly.
Including Monday's drop, the S&P 500 has now lost 18 percent since setting a record last month. If it hits a 20 percent drop, it would mean the death of what’s become the longest-running bull market for U.S. stocks in history, an 11-year run. Monday marks the 11th anniversary of the market hitting bottom after the 2008 financial crisis.
The yield on the 10-year Treasury note plunged to 0.59 percent, down sharply from 0.70 percent late Friday. Early last week, it had never been below 1 percent.
A measure of fear in the U.S. stock market soared to its highest level since 2008. That means traders are more worried about upcoming swings in the S&P 500 now than they were during the European debt crisis, the U.S.-China trade war or at the height of recession worries after the Federal Reserve raised rates four times in 2018.
The circuit breaker tripped in the U.S. stock market is meant to slow things down and give investors a chance to breathe before trading more.
Traders are increasing betting that the Federal Reserve will cut interest rates back to zero to do what it can to help the virus-weakened economy, perhaps as soon as next week.
But doubts are rising about how effective lower rates can be this time. They can encourage people and companies to borrow, but they can't restart factories, restaurants or theme parks shut down because people are quarantined.
The Fed has already cut its benchmark short-term rate to a range of 1% to 1.25%, leaving little room to cut more.
“Central banks are a bit player in the current crisis,’’ Ethan Harris, global economist at Bank of America, wrote in a research report.
The clamor is growing louder for help from authorities besides central banks.
“Today’s market action may bang some heads together and actually start thinking about the constructive measures the government can take,’’ said Jacob Kirkegaard, senior fellow at the Peterson Institution for International Economics.
Among other things, Kirkegaard said, the government should make sure all Americans get paid sick leave and health care coverage for virus-related ills.