Stocks on Tuesday sold off hard again, after the Dow Jones Industrial Average fell more than 1,000 points Monday, as the coronavirus has spread globally.
Tuesday, the S&P 500 fell 1.18%, with the Dow Jones down 1.14% and the tech-heavy Nasdaq down 1.27%. The S&P 500 is now down 5.9% from its all-time high.
The 10 year treasury yield hit its lowest level since July 2016, hitting 1.325%. That’s an inversion with the 3-month yield at 1.53%, which is up a tad. Investors flock into longer-dated bonds for safety when they are bearish on economic growth and inflation.
Economists and strategists expect a hit to global economic growth as the spread of the coronavirus, now in Italy and several Asian countries, threatens to further shut down manufacturing plants.
As U.S. importers use extra inventory, they may have to rely on more imports sooner than expected, but may not be able to do so. Consumers stay home as well, further pressuring revenues across industries.
Not much new happened Tuesday, as Tuesday’s sell-off “is really a continuation” of Monday’s, Charlie Ripley, Senior Investment Strategist at Allianz Investment Management said. "We had markets coming from lofty levels and people are taking risk off the table and people are continuing that. It’s a classic flight to quality.”
Importantly, the stock market rally seen at the beginning of 2020 and through Friday wasn’t truly risk on. Utilities — a sector not sensitive to economic changes as well as a proxy for bonds with high dividend yields -- had outperformed the market leading up to Friday. The 10-year treasury yield has slipped fro 1.877% to start January to where it is Tuesday.
Investors expect the Federal Reserve to cut rates once or twice in 2020 to keep the economic expansion going, a possibility that has strengthened on the back of the coronvirus. China has provided monetary stimulus in the form of relaxed bank reserve requirements and lower interest rates, including a rate cut this week. The EU, which is home to already negative rates, may induce fiscal stimulus soon.
But rates and all forms of stimulus can only go so low. "We already are in an environment where rates have been lowered,” said Ripley.
“That’s one reason they’re willing sit back and let things play out.” Plus, many economists say that when the virus is eradicated, global economic activity will resume and post strong growth rates compared to the current quarter.
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