The Dow whipsawed back into decline on Friday, diving more than 200 points after a stock market that’s “priced for perfection” was forced to reckon with a global growth outlook that looks anything but perfect.
The Dow Jones Industrial Average plunged at the opening bell. By 9:36 am ET, the index had lost 217.61 points or 0.75% to trade at 28,641.83.
Uncertainty about the economic impact of the coronavirus outbreak has left the stock market awash in volatility. On Thursday, a browbeaten Dow swung nearly 400 points off its lows to close with a gain of just under 125 points.
Today’s downturn reversed that recovery and put the Dow on track to record its second straight weekly loss.
The S&P 500 and Nasdaq also traded lower, although their losses were far less severe. The S&P 500 declined 0.43% to 3,269.14, while the Nasdaq – bolstered by a surging Amazon – dipped just 0.05% to 9,294.03.
Treasury bond yields fell as investors spurned stocks. The yield on the 10-year Treasury briefly slipped below the three-month Treasury rate. This yield curve inversion is a classic recession signal.
The oil price extended its weeklong bloodbath, falling 0.73% even after the World Health Organization rebuked calls for travel restrictions to coronavirus-stricken China. Crude still faces long-term risks from the impact that the outbreak could have on Chinese economic growth.
Gold failed to capitalize on the risk-off move in stocks, falling 0.2% to $1,586.
Coronavirus containment continues to loom large for the stock market, but the Dow’s struggles partially stemmed from Caterpillar’s unsettling earnings report.
Shareholders were pleased that fourth-quarter profit beat estimates, but they were not pleased when 2020 profit guidance came in at just $8.50 to $10.00 per share – well below the analyst consensus of $10.55 [Bloomberg].
Wall Street’s worried, too.
The Dow Jones stock is a bellwether for global growth, and CEO Jim Umpleby said that uncertainty about the economy drove the company’s weak outlook.
We expect continued global economic uncertainty to pressure sales to users in 2020 and cause dealers to further reduce inventories.
Caterpillar’s warning is eerily similar to FedEx’s earnings call from December 2019.
The delivery company is hyper-sensitive to changing business conditions, and CEO Fred Smith said that “the industrial economy does not reflect any growth at all” – no matter how bullish the stock market might be.
Goldman Sachs predicts that the coronavirus epidemic could have a severe impact on near-term U.S. economic growth due to lower tourism from China and reduced U.S. exports to China. Annualized growth could slow by as much as 0.4% during the first quarter [CNBC].
The Goldman analysts expect a sharp GDP rebound in the second quarter to offset the bulk of those losses, reducing the full-year impact to a “small net drag” of 0.05%. But they concede that the risks are “skewed towards a larger hit,” especially if the U.S. branch of the outbreak worsens.
Coronavirus isn’t the only reason the stock market might need to brace for a particularly grisly first-quarter GDP number.
Wall Street expects the fallout from the Boeing 737 Max scandal to continue to seep into the broader U.S. economy as suppliers grapple with the sudden plunge in demand for the aircraft. U.S. Treasury Secretary Steven Mnuchin recently said that Boeing could drag overall GDP by as much as 0.5% for the year [Fox Business].
Art Hogan, the chief market strategist at National Securities, warned this week that, despite these mounting risks, “stocks are relatively priced for perfection” [MarketWatch].