Coronavirus fears and a crash in oil prices sent a shudder through financial markets on Monday, with stocks plummeting so fast on Wall Street that they triggered the first automatic halt in trading in over two decades.
The Dow Jones Industrial Average plunged 7.8%, and European markets entered a bear market, registering their heaviest losses since the darkest days of the 2008 meltdown, as the damage mounted from the crisis that has closed factories, schools and stores and led to travel bans and unprecedented quarantines.
“The market has had a crisis of confidence,” said Willie Delwiche, investment strategist at Baird.
The market slide came as Italy, the hardest-hit place in Europe, began enforcing a lockdown against 16 million people in the north – a quarter of the population – with masked police officers and soldiers checking travellers’ documents. The turmoil is expected to push Italy into recession and weigh on the European economy.
In the US, a cruise ship with a cluster of coronavirus cases that forced it to idle off the California coast for days arrived at the port of Oakland as officials prepared to start taking passengers to military bases for quarantine or get them back to their home countries.
The Grand Princess had more than 3,500 people aboard — 21 infected with the virus.
The escalating crisis combined with an intertwined development — plummeting oil prices — to drag down the market. The price of oil sank nearly 20% after Russia refused to roll back production in response to virus-depressed demand and Saudi Arabia signalled it will ramp up its own output.
While low oil prices can translate into cheaper fuel, they wreak havoc on energy companies and countries that count on petroleum revenue, including the number one producer, the US.
On Wall Street, the S&P 500 plunged 7.4% in the first few minutes after the opening bell before trading was halted by the market’s circuit breakers, first adopted after the crash of October 1987 and modified over the years to give investors a chance to catch their breath.
The market-wide circuit breakers have been triggered only once before, in 1997.
After the 15-minute pause, the S&P trimmed its losses but was still down 6.9% in the late afternoon.
US stocks edged ever closer to a bear market, defined as a drop of 20% from its peak, while a gauge of fear on Wall Street reached its highest level since the 2008 global financial crisis.
Italy’s stock index plunged 11.2%. Britain, France and Germany were down between 7.7% and 8.4%.
The interest rate, or yield, on US Treasury bonds sank to all-time lows as investors looking for a safe place kept on sinking money into them, even as the return on their investment sank closer and closer to zero.
The yield on the 10-year Treasury note plunged to 0.54%. Up until last week, it had never been below 1%.
The carnage in the energy sector was particularly bad. With benchmark US crude dropping to under 32 dollars a barrel, Marathon Oil, Apache and Diamondback Energy each sank more than 40%. Exxon Mobil and Chevron were on track for their worst days since 2008.
While the crisis is easing in China, where the virus was first detected, fast-growing clusters have turned up in South Korea, Iran and Italy, and fears are mounting in the US.
After initially taking an optimistic view on the virus, hoping that it would remain mostly in China and cause just a short-term disruption, investors are realising they probably underestimated the crisis.
Including Monday’s drop, the S&P 500 has lost 18.3% since setting a record last month. If it hits 20%, it would mean the death of what has become the longest-running bull market for US stocks in history, an 11-year run. Monday marks the 11th anniversary of the market hitting bottom after the 2008 financial crisis.
Traders are increasing betting that the Federal Reserve will cut interest rates back to zero to do what it can to help the virus-weakened economy, perhaps as soon as next week.
But doubts are rising about how effective lower rates can be this time. They can encourage people and companies to borrow, but they cannot restart factories, restaurants or theme parks because people are quarantined.