US market plunges as investors fear recession

The Dow Jones Industrial Average plunged nearly 3,000 points Monday despite the Federal Reserve's decision to slash interest rates close to zero as investors doubted the emergency action will be enough to halt a feared recession due to the worldwide spread of the coronavirus.

The Dow Jones Industrial Average closed down 2,997.10 points, or 12.93 percent at 20,188.52. The S&P 500 lost 324.89 points, or 11.98 percent, and closed at 2,386.13. The Nasdaq Composite skidded 970.28 points, or 12.32 percent, and closed at 6,904.59.

The three major indexes have fallen into bear-market territory, or a correction of at least 20 percent. The S&P 500 is down about 27 percent from its high in mid-February.

"Going forward, as has been the case for more than three decades in Japan and for a decade in the European Union and now in the US, generating growth through monetary policy is over," Manish Shah, chief investment officer at Tollbooth Strategy, told China Daily.

"Where does the market go from here? Most likely nowhere and annual returns of more than three percent for indexes will sound like a fairy tale. This is the new stagflation and it will be a very long time before we will get out of this situation."

Boeing, one of 30 blue chip stocks tracked daily to calculate the Dow Jones Industrial Average, fell 23.85 percent Monday to $129.61. The 52-week high is $398.66.

Bank stocks were clipped. JPMorgan Chase lost 14.96 percent. Bank of America fell 15.40. Citi shed 19.30 percent.

Travel and hotel companies were hit hard. Delta Airlines fell 6.65 percent. United Airlines lost 14.82 percent. Hilton Hotels fell 11.56 percent while Marriott lost 9.61.

Dow stocks dropped about 2,250 points on the opening, triggering trading halt. The market edged slightly lower when trading resumed after a 15-minute halt, but recouped some early losses and traded within a narrow — but negative — range.

The market's sharp decline amid coronavirus fears suggests US President Donald Trump is in danger of losing the November election, Moody's Analytics said.

When the market was strong in February, Moody's election model predicted Republican Trump would win 351 Electoral College votes to 187 for the Democratic Party's challenger. Each state's electoral votes are determined by the number of representatives it has in the House based on population plus two senators. A total of 270 Electoral College votes are needed to win.

Bernard Yaros, an economist at Moody's Analytics in New York, said if the S&P 500 drops to 2,500 or less and remains there, Trump is in danger of losing the election. The index closed at 2,711 on Friday after a strong rebound, but closed Monday at 2,492.39.

While there is no immediate relief in sight, New York investment bank Goldman Sachs believes the market downturn is temporary and the economy will rebound strongly in the second half of the year.

"We expect US economic activity to contract sharply in the remainder of March and throughout April as virus fears lead consumers and businesses to continue to cut back on spending such as travel, entertainment and restaurant meals," Goldman Sachs said in a research note.

"Emerging supply chain disruptions and the recent tightening in financial conditions will likely add to the growth hit."

Nevertheless, Goldman Sachs expects the economy to start to recover after April and forecasts "strong sequential growth" in the second half of 2020 and further gains in early 2021.

The investment bank expects no growth in the first quarter of 2020, negative 5 percent in the second quarter, plus 3 percent in the third quarter and plus four percent in the fourth quarter — up from the initial expectation of plus 2.25 percent growth at the end of the year.

In response to Monday's market plunge, investors sought safety in US government bonds as concern about global growth prospects grew.

The yield on the benchmark 10-year US Treasury note fell to 0.739 percent from 0.946 percent at Friday's close as the price edged up. Bond yield and price move in opposite directions.

In emergency action Sunday, the US Federal Reserve cut interest rates to 0 – 0.25 percent, the lowest level since 2015. The Central Bank also announced a new $700 billion round of quantitative easing, or asset purchases intended to pump new funds into the money supply.

"The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals," the Fed said in a statement.

"To support the smooth functioning of markets for Treasury securities that are central to the flow of credit to households and businesses, over coming months, the (Federal Open Market Committee) will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion."

The Fed has fired its best shots and therefore can't use interest rate cuts in the future to stimulate the economy.

"The Fed was able to support the housing market by acquiring mortgage loans that led to the expansion of the housing market in the last 10 years," Tollbooth's Shah said. "The Fed now has to find ways to support economic expansion without the help of the interest rate tool because rates are already near zero."

JPMorgan Chase said last week's stock sell-off was overdone, but implied a 65 to 75 percent chance of recession in the next 12 months. A recession is defined as two consecutive quarters of negative growth.

"The market has gone ahead and priced in too severe of an adverse scenario, assuming we get timely and strong counter-policy response and a Covid-19 outbreak that peaks in the coming weeks," Dubravko Lakos-Bujas, JPMorgan's chief equity strategist, said in a research note to investors.

"The speed and intensity of the sell-off has shaken investor confidence with many now modeling recession scenarios even though there is still significant lack of clarity on the actual fundamental impact."

The market rout in the last two weeks has wiped out the S&P 500's gains of the last two years. But there may be a rebound ahead because "equal or worse single day sell-offs were followed by median forward returns of +4 percent and +17 percent over the subsequent 1-week and 12-month periods, respectively," he said.

Brent crude oil, a global benchmark, to $29.78 a barrel — down more than 50 percent since the start of the year. Oil is seen as a gauge of future economic activity. The continued slide suggests investors anticipate a worldwide economic slowdown.

In Monday's trading, Exxon Mobil lost 9.55 percent. Conoco fell 16.79 percent. Chevron skidded 16.46 percent. Sunoco dropped 17.95 percent.