It's been an historic week on Wall Street, with investors running for the exits amid expectations that the still-unchecked coronavirus epidemic is already infecting global growth – and possibly set to end the longest economic expansion in history.
While large and dramatic in numbers terms - the Dow Jones Industrial Average fell Thursday by 1,190 points, the largest daily point drop in history, in percentage terms the stock market declines are on par with past stock market corrections - for now.
On the flip side - bonds, the U.S. dollar and gold - all places which investors flee when the going gets rough – have surged, sending bond yields in particular to places they have never been before. At last check, the yield on the 10-year note was at 1.195%.
“Investors are trying to price in the worst case scenario and the biggest risk is what happens now in the United States and other major countries outside of Asia,” SEI Investments Head of Asian Equities John Lau told Reuters. “These are highly uncertain times, no one really knows the answer and the markets are really panicking.”
There is no doubt that the global economy, and the U.S. economy with it, has already taken a significant hit, as consumers and businesses alike retrench.
From still-idle factories in China and other parts of Asia to warnings from the likes of Microsoft (MSFT) - Get Report, Apple (AAPL) - Get Report and other major companies, the consensus is not if, but by how much Covid-19 will impact growth.
At the same time, the plunge in stocks and surge in bonds has rapidly turned into a not-so-subtle smoke signal from Wall Street to the Federal Reserve to do something - and fast.
“Once markets are gripped by fear, the only way to break the back of financial panic is for the government authorities and the central bank to take firm action aimed at helping the economy overcome any foreseeable difficulty,” said Chen Zhao, chief strategist with Montreal-based economic research firm Alpine Macro. “Otherwise, fear and panic can become self-feeding, leading to more financial calamity and economic damage.”
Early on, China was criticized for not doing enough to offset the virus’ massive blow to its economy, the second-biggest in the world. In the past month, however, the Chinese government has taken numerous and drastic measures to help the economy, including large interest rate cuts, injections of cash, tax exemptions, public investments in hospitals and health care, and even subsidized loans to struggling companies.
Now, Wall Street is turning to Washington and asking the same questions.
The answers: A Federal Reserve that has given no indication of if or when it will do anything to adjust monetary policy, and a president who has publicly stated that the government is already doing everything it can and should be doing - and that the panic is the media’s fault.
“I gave a press conference yesterday that was really a very good press conference,” Donald Trump said Thursday. “Basically it was a calming press conference, it was a conference to say we’re doing well.”
Wall Street strongly begged to differ. Some analysts including Goldman Sachs Group’s equity research team are already beginning to price in no earnings growth in 2020 if the virus becomes widespread.
“We have to brace ourselves for wave after wave of earnings downgrades,” Paul O’Connor, head of multiasset at Janus Henderson Investors, told The Wall Street Journal. “The globalization of the virus extinguishes confidence in the V-shaped recovery that was the view last week.”
With the U.S. stock market capping off one of its worst runs since the financial crisis, and with no end in sight, investors are saying one thing: Take action.
“Behind the drop in Treasury yields is investor expectations that the Fed will come to the rescue with a rate cut when in trouble,” Kenta Inoue, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, wrote in a client note. “We do expect the Fed to move, but there’s a risk that the Fed will wait to see economic data and be behind the curve.”