The Dow Jones Industrial Average crashed deeper into correction territory on Friday after the World Health Organization hiked its coronavirus risk assessment to “very high.”
With California monitoring 8,400 people for potential infections, the threat of a U.S. outbreak is getting harder to ignore. And Goldman Sachs warns that the epidemic could cost Donald Trump reelection in November.
All three of the major U.S. equity indices flailed on Friday as volatility continued to rock stock markets worldwide.
The same reversal of fortunes was seen in the commodity sector, where market conditions continue to dictate risk-on and risk-off correlated moves.
Crude oil resumed its freefall, diving more than 6% to $44.18. Crude is set to post its worst week in four years.
The Japanese yen surged against the U.S. dollar as traders priced in more interest rate cuts from the Federal Reserve. But fellow safe-haven gold plummeted more than 3.5% to $1,584.
Positive U.S. economic data has done little for the Dow this week, as pending home sales beat forecasts and rebounded from last month’s massive contraction. GDP came in at 2.1% as expected, while core durable goods orders were solid with a 0.9% reading. Even personal income cleared forecasts, rising 0.6% according to Friday’s reading.
Deeply concerned with the huge drop in the Dow Jones over the last few days, Donald Trump appointed Mike Pence as coronavirus “czar.”
This did nothing to support stocks, as the first case of community spread was announced in California shortly after the president’s press conference.
The situation in the Golden State may be getting even worse. Health officials are currently monitoring 8,400 potential coronavirus cases in the United States’ most populous state and largest economy.
Then, on Friday, the WHO raised its coronavirus risk assessment to “very high.”
Health officials have still yet to label the crisis a pandemic, but WHO Director-General Tedros Adhanom Ghebreyesus’ remarks were still foreboding:
“We have now increased our assessment of the risk of spread and the risk of impact of COVID-19 to very high at global level,” he said.
Goldman Sachs may have done even more damage to the stock market than California or the WHO, though. Goldman analyst Ben Snider warned that the coronavirus outbreak could stop Trump from winning reelection in November.
If the coronavirus epidemic materially affects US economic growth it may increase the likelihood of Democratic victory in the 2020 election.
Given that left-wing Bernie Sanders is the Democratic front-runner, this prediction could have a dramatic impact on the stock market.
Wall Street has been extremely confident of another Trump victory for some time.
Adding to the stock market’s woes, the German state of North Rhine-Westphalia announced 14 new cases of the coronavirus, indicating that the disease’s spread out of Italy looks very real.
As the economic engine of the world’s second-largest economic area, trouble for Germany would be particularly meaningful for global markets.
The Dow Jones is falling rapidly even as investors aggressively price for the Federal Reserve to cut interest rates multiple times this year.
Investors clearly expect more central bank stimulus. But it might not be this simple, according to economists Morten Lund and Anders Svendsen at Nordea.
They warn in their “Fed Watch” report that there may only be one cut on the way in 2020:
Overall, our base case is that the Fed will cut one more time in 2020 – probably in June. If the coronavirus is not soon contained, we think a rate cut in April could be on the cards.
Such an outcome could be disappointing to a Dow Jones that has come to rely heavily on the outlook for loose monetary policy.
Friday’s Dow 30 downturn was headlined by massive losses in Boeing, its heaviest component. The U.S. aerospace giant’s stock dove 5.9% as the coronavirus outbreak put pressure on air travel.
Defensive stocks Coca-Cola and McDonald’s also suffered steep losses. KO shares dropped 5%, while MCD shares fell 4.5%.
Goldman Sachs was off another 2.9% as collapsing bond yields dovetailed with Thursday’s decision to slash its profit outlook.
All 30 Dow Jones components were in the red, and only Microsoft (-0.2%), UnitedHealth (-0.4%), and 3M (-0.7%) fell less than 1%.
With additional reporting by Josiah Wilmoth
Last modified: February 28, 2020 4:00 PM UTC