Markets Tanked Wednesday As Wall Street Realizes Coronavirus Is Here to Stay

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The stock market is in more than a mood. It’s reconciling with what could be the end of an era; the bull market and economic expansion.

All three major U.S. indexes were down hugely Wednesday, with the S&P 500 down almost 5% and the Dow Jones down more than 5%, or 1,380 points at one point. Strangely, money fled out of the safe 10 year treasury yield, moving the yield up to 0.83%, which is still abnormally below the short federal funds rate of just above 1%.

The S&P 500 is 19% below its all-time high. One more percentage point drop and the country is in a bear market, putting an end to the longest bull market in American history, which was accompanied by a slow-rising but long economic expansion and powered by low interest rates to keep consumer and business spend afloat.

When the market began correcting at the end of February, the phrase on Wall Street was “buying opportunity.” Many thought the coronavirus, which is still forcing consumers to stay home and manufacturing plants to stay shut, would be contained soon and that the second half of the year would post a recovery in economic growth back to 2% for most developed countries.

The fear in the U.S. was the spread of the virus into the country. Its fear now is that without the massive quarantines in the country, the virus would spread like wildfire.

And while the current, equity risk premium — or the excess rate of return investors demand on stocks over the safe treasury market — is high at 5.2% (historical average is 3%), investors are demanding that premium because they think a recession is almost imminent.

The WHO said Wednesday the coronavirus is indeed a pandemic.

Several Wall Street shops are now raising the likelihood of a recession in the first half of 2020. There are reports that UBS has lowered its second quarter GDP estimate to -0.8%. Two consecutive quarters of negative GDP growth is a recession. UBS hasn’t confirmed this yet. Unigestion Asset Management, which has $23 billion under management, sees GDP coming in at 0% for the next several months, with inflation coming in at below 0%.

Earnings estimates have come down for 2020, with the average Wall Street estimate now below 170. The earnings multiple is still compressed, at 16.4, below its 2020 high of 19 times earnings.

The Federal Reserve has already cut interest rates and President Trump has spoon of a fiscal stimulus package.

Naysayers point out that more money in the pockets of people and businesses can’t get economic activity up and running if the issue is that people are afraid to leave home and get sick.

The idea is to pad a second half recovery, but the economic fallout from the virus may have its way with the economy, as interest rates are already low. If Starbucks  (SBUX) - Get Report is any indicator of other companies, companies may reopen stores, manufacturing plants and other operations slowly. Growth may not resume quickly. 

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