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The Dow bounced back resoundingly from last week’s brutal coronavirus-related selloff, surging nearly 1,300 points on news that global central banks were poised to provide stimulus to combat the outbreak’s effects on the economy and markets.
The gains offset a little more than a third of last week’s historic losses.
Many investors also likely reckoned the market’s plunge may have overstated the risks to the economy and corporate earnings, some analysts say.
“Investors decided it seemed overdone,” says Chris Zaccarelli, chief investment officer of Independent Advisor Alliance.
Perhaps more significant, he says, is that central banks, including the U.S. Federal Reserve, are poised to cut interest rates or take other are taking steps to stimulate borrowing and economic activity.
The Dow Jones Industrial Average surged more than 1,293 points, or 5%, to 26,703 in its biggest one-day point gain ever and the largest percentage increase since March 2009. The S&P 500 index rose 136 points, or 4.6%, to 3,090. The Nasdaq added 385 points, or 4.5%, to 8,952.
Despite the pickup in stocks, the bond market signaled that investors are still worried.
Bond prices fell, pushing yields higher after they touched another record low earlier in the day. The yield on the 10-year Treasury note rose to 1.15% from 1.12% late Friday.
The big bounce in stocks came after an especially wild day of trading Friday, when the Dow sank more than 1,000 points before a late wave of buying left it down 350.
“Investors have convinced themselves that global central banks will likely be even more accomodative in order to short-circuit any psychological damage, ” said Sam Stovall, chief investment strategist at CFRA.
The International Monetary Fund and World Bank announced simultaneously Monday that they are ready to help countries affected by the coronavirus through their emergency lending programs and other tools.
“We will use our available instruments to the fullest extent possible,” IMF Managing Director Kristalina Georgieva and World Bank President David Malpass said in a joint statement. “International cooperation is essential.”
The statement echoed similar promises to act if necessary from the Federal Reserve on Friday and the Bank of Japan over the weekend. Some analysts speculate that the Fed could cut rates this week before its next formal meeting March 17-18. Traders priced in a 100% probability that the Fed will cut rates by a half-percentage point during or before its meeting this month.
There were signs that the economic impact was continuing to mount. A measure of China’s manufacturing output plunged last month to its lowest level on record, as the viral outbreak closed factories and disrupted supply chains.
Separately, economists at Goldman Sachs slashed their forecasts for U.S. growth to just 0.9% in the first quarter and to zero for the April-June quarter.
But the worst of the damage to markets may be over if the spread of the virus in the U.S. is contained, Zaccarelli says. But if it spreads more significantly here, stocks will likely plummet even more sharply, he says.
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‘Not a typical economic blow’
The Organization for Economic Development, a research organization made up of mostly advanced economies, cut its world growth forecast in a report Monday. The OECD said that even if there are only limited outbreaks outside China, the global economy will grow just 2.4% this year, the weakest since the financial crisis in 2009. That forecast matches several private estimates.
If other countries are hit with outbreaks similar to China’s, growth could fall as low as 1.5%, the OECD said.
For investors, the great amount of uncertainty over how consumer behavior and spending will be affected has been unsettling.
“It’s not a typical economic blow,” said Bill Strazzullo of Bell Curve Trading. “What if major cities are on some kind of a lockdown? What will that do to restaurants, entertainment, shopping, travel? It’s almost impossible to game this out.”
Last week’s rout knocked every major index into what market watchers call a “correction,” or a fall of 10% or more from a peak. Market watchers have said for months that stocks were overpriced and long overdue for another pullback. The last time the market had a drop of that size was in late 2018, when the trade war with China was escalating and investors were worried about rising interest rates.
The virus outbreak that began in central China has been shutting down industrial centers, emptying shops and severely crimping travel all over the world. More companies are warning investors that their finances will take a hit because of disruptions to supply chains and sales.
Given that the main economic impact so far of the virus outbreak is on the supply side of economies rather than on the demand side, questions are being asked as to whether looser monetary policy will have any meaningful impact.
“For all the talk of lower rates the one thing a rate cut can’t do is get people back to work and supply chains back running again,” said Michael Hewson, chief market analyst at CMC Markets.
Stimulus hopes nevertheless helped shore up markets in Asia earlier. The Nikkei 225 index closed 1% higher, while the Shanghai Composite index rose 3.2%. The benchmark for the smaller exchange, in Shenzhen, jumped 3.8%, while South Korea’s Kospi climbed 0.8%. The Hang Seng in Hong Kong climbed 0.6%.
China has seen most of the 90,000 or so virus cases worldwide. In the United States, authorities have counted at least 80 cases of the virus, two fatal, and concern was driving some to wipe store shelves clean of bottled water, hand sanitizer and other necessities. Both deaths were men with existing health problems who were hospitalized in Washington state.
Oil prices have also slumped as traders price in the prospect of lower demand as a result of the virus outbreak. Last week, oil prices tanked by around 15%. On Monday, benchmark U.S. crude was up $2.07 to $46.83 per barrel. Brent, the international standard, rose $2.28 to $51.95.
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Contributing: Associated Press
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