New York • Stocks fell sharply on Wall Street on Monday following a fear of coronavirus and a drop in oil prices, triggering a brief automatic stopping of negotiations to allow investors to catch their breath.
Oil prices fell nearly 20% after Russia refused to cut production due to falling prices and Saudi Arabia announced that it would increase production.
While low oil prices can eventually translate into cheaper gasoline, they are wreaking havoc on already struggling energy companies and oil-dependent countries, including the top producer, the United States.
The war between the oil-producing giants came as Italy headed for a huge economic blow as it imposed a lockdown on 16 million people in the north of the country, the heart of its manufacturing industries and financial. The crisis should push Italy into recession and weigh on the European economy.
The carnage in other markets was almost as breathtaking as it was in oil. US stocks have moved closer to a bear market, signified by a 20% drop in its record, while a measure of market fear has reached its highest level since the 2008 financial crisis. Europeans fell even more sharply, and treasury bill yields plunged to record lows in the latest vicious swings for a market that has rocked investors in recent weeks.
The S&P 500 plunged 7.4% in the first few minutes of trading, and the losses were so great that trading was temporarily halted. The stocks reduced their losses after the shutdown, and the index fell 4.8% at 11:44 am EST.
The Dow Jones Industrial Average lost 1,255 points, or 4.9%, to 24,605, after briefly dropping more than 2,000. The Nasdaq fell 4.4%.
The carnage in the energy sector was particularly striking. Marathon Oil, Apache Corp. and Diamondback Energy each sank more than 40%. Exxon Mobil and Chevron were on the right track for their worst days since 2008.
“The path of least resistance is still falling,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.
Yields on treasury bills have declined as investors have plunged into everything that seems safe, even if it pays closer to nothing every day. Traders are increasing bets that the Federal Reserve will cut interest rates to zero to do what it can to help the weakened economy, possibly as early as next week.
All drops are the result of fear of the unknown. As COVID-19 spreads around the world, many investors feel powerless to try to estimate how much it will hurt the economy and corporate profits, and the simplest answer to such uncertainty might be to get out. After initially adopting an optimistic view of the virus – hoping that it would remain mainly in China and cause only short-term disruption – investors realize that they have probably underestimated it.
The virus has infected more than 110,000 people worldwide, and Italy followed China’s example on Sunday by quarantining much of its country in hopes of stopping the spread. This raised more fears that quarantines would scold companies’ supply chains even more than they already have.
The new coronavirus is now spreading to all continents except Antarctica and is hurting consumer spending, industrial production and travel.
Many analysts and professional investors say they expect large swings to continue to dominate the market as the number of new virus cases picks up.
Including Monday’s drop, the S&P 500 has now lost 16.5% since setting a record last month. If it falls 20%, it would mean the death of what has become the oldest bull market in US stocks in history. Monday actually marks the 11th anniversary of the market’s downturn after the 2008 financial crisis.
A measure of fear on the US stock market has reached its highest level since 2008. This means that traders are more concerned about the next fluctuations 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 breaker on the US stock market is supposed to slow things down and give investors a chance to breathe before they trade more.
The 10-year Treasury bill yield plunged to 0.59%, down sharply from 0.70% on Friday evening. At the start of last week, it had never been below 1%.
Short-term yields fell as traders increasingly bet that the Federal Reserve would cut rates to do what it could to help the economy. The two-year Treasury yield, which is moving more in line with Fed expectations, fell to 0.40% from 0.46%.
The Federal Reserve and other central banks around the world have provided the ultimate safety net in the past during this bull market, supporting the markets with rate cuts and other stimulus. But doubts are increasing as to the effectiveness of the lower rates this time. They can encourage people and businesses to borrow, but they cannot restart factories, restaurants, or theme parks that are closed because people are quarantined.
The Federal Reserve has already lowered its short-term benchmark rate to within the range of 1% to 1.25%, which leaves it little room for maneuver. Traders estimate in almost a 50% probability that the Fed will fall to a range of zero to 0.25% at its meeting next week.
“Central banks play an important role in the current crisis,” wrote Ethan Harris, global economist at Bank of America, in a research report.
This is why the clamors are getting louder to get help from authorities other than central banks.
“The action in today’s market can strike your head and start thinking about what constructive action the government can take,” said Jacob Kirkegaard, senior researcher at the Peterson Institution for International Economics.
Among other things, said Kirkegaard, the government should ensure that all Americans receive paid sick leave and medical coverage for problems related to the virus.
Crude oil Brent, the international standard, lost $ 8.50, or 18.8%, to $ 36.77 a barrel. US benchmark crude oil fell from $ 7.35 to $ 33.93.
Investors were already dropping oil due to fears that a global economy weakened by viruses would use less fuel. But concerns over the supply dropped the latest fake on the market on Monday. Reports that Saudi Arabia could increase oil production to gain market share have raised fears that the world will soon be inundated with too much oil.
AP Business editor Damian J. Troise and AP Economics editor Paul Wiseman contributed to this.