The Dow Jones fell nearly 150 points on Tuesday as Apple’s coronavirus warning rattled through the U.S. stock market.
Wall Street still appears confident that its domestic economy is sheltered from China, but this optimism may be cracking. The global outlook for growth looks bleaker by the day.
The Dow Jones Industrial Average was easily the worst performer among the U.S. stock market’s major indices on Tuesday.
The bellwether index rallied off its session lows ahead of the closing bell. But as of 3:18 pm ET, the Dow was still down 149.13 points or 0.51% to settle at 29,248.95.
The S&P 500 fell 0.21%, while the Nasdaq proved more resilient. The tech-heavy index crept into positive territory thanks to a massive 7% rally in Tesla stock.
There was a note of risk-off in the commodity sector as the price of gold rallied more than 1%, and crude oil dipped slightly after recovering from steep early losses.
There’s mounting evidence that the coronavirus outbreak will have a severe impact on the Chinese economy, but Apple’s decision to downgrade its earnings forecast still caught Dow Jones bulls off-guard.
But even more significant for the stock market is the increasingly shaky global economy.
Japan and Germany, two of the world’s top four nations by GDP, were already struggling before the coronavirus struck, and clearly, China unexpectedly faces major issues itself.
Bill Diviney, a senior economist at ABN AMRO, provided the following take on the worrying storyline playing out both in Asia and Europe:
Q4 GDP data for both Japan and the Eurozone suggest very weak underlying growth dynamics, well before the impact of the coronavirus will be felt.
Given that these economies are the most exposed of the developed world to China, the weakness does not bode well for the global growth outlook – and suggests downside risks to our already low growth expectations for 2020.
The relatively strong performance of the U.S. stock market has hinged on data demonstrating that just 0.5% of its export demand is from China.
Compare this to 20% from Japan – whose tourism industry relies principally on China -and the fact that 3% of Germany’s entire GDP comes from Chinese car buyers. Auto-demand looks to have all but dried up amid the coronavirus outbreak, as Jaguar Land Rover confirmed today.
But that doesn’t mean the U.S. is immune to the coronavirus slowdown.
Despite market perception, the Federal Reserve has explicitly acknowledged the linkage between Japan and the U.S. economy. As FOMC member Richard Clarida said last year.
Beyond bilateral linkages, economic conditions in the United States and Japan are tightly linked to global economic developments.
That leaves the Dow Jones in a far more precarious position than its robust performance suggests.
A more compelling justification for the stock market’s resilient optimism is that many Wall Street analysts expect the Chinese economy to make a V-shaped recovery.
With iPhone demand and supply both threatened, it was unsurprising to see one of the index’s most heavily weighted stocks struggling, shedding almost 3% at its lows.
It didn’t help that Nikkei reported that some iPhone suppliers are operating at just 30% of capacity due to the coronavirus outbreak.
Apple stock did move off its lows after news broke that it would move key manufacturing operations to Taiwan to avoid the slowdown in mainland China. AAPL shares were last down 1.7%.
Exxon Mobil continues to be the “Dog of the Dow” as the oil giant drops further with the price of crude. It’s down over 1.3% today – and 12% on the year.
Defensive domestic play Walmart was the Dow Jones’ best performer, rallying 1.6% – a weaker than expected holiday season notwithstanding. Despite the WMT rally, the poor results are further evidence that buoyant consumer confidence has stopped showing up in actual retail sales.
Last modified: February 18, 2020 8:28 PM UTC