S&P 500, Nasdaq fall 3% after steep declines across Europe, Asia; bond yields approach new lowInvestors around the world retreated from stocks and piled into haven assets including government bonds and gold, reflecting escalating worries that the coronavirus will disrupt the global economy.
The Dow Jones Industrial Average dropped more than 1,000 points—its biggest point decline in more than two years; the yield on the benchmark 10-year Treasury note approached a record low; and gold prices climbed for the eighth straight session to a seven-year high.
Apple dropped a bombshell last week. Yet Wall Street, in the throes of a historic meltup, reacted with a collective shrug.
America's most valuable company warned investors on February 17 that its sales would miss the mark because of chaos caused by the coronavirus outbreak in China.
Yet investors, betting the coronavirus storm would soon pass, plowed into tech stocks, sending the Nasdaq to a record high the next day. By February 19, the S&P 500's price-to-earnings ratio, a common valuation metric, climbed to new cycle highs.
That cautious optimism has since been abandoned.
Coronavirus fears sent the Dow plummeting 1,000 points, or 3.4%, on Monday. The index has now lost more than 1,300 points in the span of just three trading days. The wave of selling wiped has out the Dow's gains for the year.
The episode shows how complacent investors became about the threat the coronavirus poses to the fragile world economy. That attitude left stocks vulnerable to a market freakout like the one gripping Wall Street now.
"Many misjudged the economic severity of the virus early on, making them more open to entertaining worst-case scenarios now," Alec Young, managing director of global markets research at FTSE Russell, wrote in a note to clients Monday.
Part of that misjudgment could be due to the fact that this is a health crisis, not just an economic one.
"There's a lack of understanding about the impact of the coronavirus because investors aren't typically health experts," said Kristina Hooper, chief global strategist at Invesco. "And even the health experts can't tell us much about the disease."
Tourism stocks retreated sharply Monday. Carnival (CCL) and Royal Caribbean (RCL) lost 7% apiece. American Airlines (AAL) and Delta (DAL) dropped even more.
"In many ways, this is worse than the tariff wars," said Hooper. She noted that while the damage from the US-China trade war was limited to manufacturing, the coronavirus scare is impacting the far larger service sector.
It's not just US stocks getting hammered. South Korea's Kospi plummeted nearly 4%, its worst day since October 2018. Italy's benchmark index got clobbered, losing more than 5%.
The hope last week had been that the coronavirus was largely contained to China. While that would certainly deal a blow to the world's No. 2 economy, it could limit the damage to the global economy. However, the latest developments suggest that optimism was misplaced.
The coronavirus has spread, with outbreaks in South Korea, Iran and Italy taking place in recent days. That has deeply negative implications for airlines, hotels, restaurants and other consumer companies.
"Global equities are in a bit of a free-fall this morning," Paul Hickey, co-founder of Bespoke Investment Group, wrote in Monday report.