Dow Ends 11-Year Bull Market as Coronavirus Defies Economic Remedies

on Mar12
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The coronavirus outbreak ended one of the longest winning streaks in market history on Wednesday as the Dow Jones industrial average plunged and global policymakers grappled with the growing economic crisis.

The Dow closed with a loss of nearly 6 percent. That brought the decline from its most recent peak to more than 20 percent, the threshold that defines a bear market, after the Dow’s 11-year run in bull-market territory.

The broader S&P 500 was off nearly 5 percent for the day, though down less than 20 percent from its peak less than a month ago. On Thursday, stocks in the Asia-Pacific region again fell broadly, with shares in Japan down more than 5 percent at midday. Futures markets signaled grim news for Wall Street.

The full economic toll of the outbreak will not be clear for months. But there is mounting evidence that it will be severe.

Airlines are warning of empty planes and huge financial losses. A sharp drop in oil prices is threatening to put energy companies out of business and thousands of American drillers out of work. Supply-chain bottlenecks are forcing factories around the world to cut output, even as a slump in consumer confidence is raising doubts that there will be demand for their goods once production resumes.

Policymakers on both sides of the Atlantic appeared unwilling or unable to mount an aggressive response to the crisis. A rate cut by the Federal Reserve last week failed to calm financial markets. A similar move by the Bank of England on Wednesday was equally ineffectual.

Governments in Europe were struggling to manage their budgets even before the virus struck, limiting their ability to spend heavily to keep their economies afloat. And in the United States, which faces no such constraints, President Trump has resisted aggressive stimulus measures that many economists say are necessary to contain the damage.

“If the Trump administration and Congress can’t get it together quickly and put together a sizable and responsible package, then a recession seems like a real possibility here,” said Mark Zandi, chief economist for Moody’s Analytics. He said he saw a roughly 50 percent chance of a recession in the next year.

As recently as a week ago, few economists thought a recession was likely. Most thought that any damage from the virus would be brief, and that the economy would experience a sharp, “V-shaped” recovery. Forecasts have become significantly gloomier, however, as the virus has spread in the United States and as the effects around the world have become more pronounced.

“This is not a financial crisis,” Citigroup’s chief executive, Michael Corbat, told the president. “The banks and financial system are in sound shape, and the banks are here to help.”

Mr. Trump, often with his arms crossed, appeared to lament the end of the bull market. He cited the strength of the February jobs report and said additional data suggested that the economy was still running smoothly.

“Now we’re hitting a patch,” he said. “And we’re going to have to do something with response to this virus.”

Investors were not convinced. Hopes for a stimulus package, which helped drive stocks sharply higher on Tuesday, faded Wednesday, and so did the rally: Oil prices tumbled again, pulling down energy stocks. Consumer discretionary stocks — a sector that includes both cruise lines and restaurants — also dived, as investors appeared to price in a downturn in spending among Americans. Analysts at Goldman Sachs said Wednesday that they expected the S&P 500 to fall another 11 percent by midyear.

“Even if the virus situation improves, we’re looking at people just being very cautious about going back,” said Nariman Behravesh, chief economist for IHS Markit. “It’s going to take a while for people to feel comfortable to go back into large crowds, to get back on an airplane.”

Indeed, no amount of fiscal stimulus or interest-rate cuts will restore canceled flights or postponed events — nor, at a time when health officials are recommending “social distancing,” would policymakers want to. The only thing that could truly prevent economic damage or settle financial markets lies beyond the power of economic policymakers: getting the virus itself in check.

“I don’t think it’s something that conventional fiscal and monetary policy can solve,” said Lewis Alexander, chief U.S. economist at Nomura Securities in New York. “It’s not like if you just write a big enough check everything will be fine.”

But economists said there was still a window of opportunity to limit the damage and avoid the cascading ripple effects that could cause a recession. Targeted aid for affected industries could help prevent layoffs. Cash payments could allow people to keep spending even if their hours are cut or they miss work because of a quarantine.

That window could be closing. The employment site ZipRecruiter said Wednesday that it had seen a sharp decline in postings for jobs in hotels, restaurants and other affected industries, one of the first wobbles in the labor market.

Consumer confidence in March suffered its largest single-month drop of Mr. Trump’s tenure in office, according to a nationwide poll conducted for The New York Times by the online research firm SurveyMonkey. The decline was some of the first evidence that the outbreak — and the financial market turmoil it has caused — is threatening consumer spending, the linchpin of the decade-long economic expansion.

The drop in confidence is not yet dire: More people (39 percent) expected very good or somewhat good business conditions in the coming year than those who expected very bad or somewhat bad conditions (22 percent). But sentiment could be shaken further by the continuing financial turmoil. The poll was conducted last week and completed on Sunday, before stock markets dropped 8 percent on Monday in a single day of virus-driven losses.

Adding to the challenge, the people most at risk of losing their jobs or hours are mostly service workers: hotel housekeepers, airport vendors, waiters and waitresses. Those workers are less likely than white-collar workers to have paid sick leave, and they are less likely to have the financial resources to weather a period of reduced income. That could worsen the impact on consumer spending, said Michelle Meyer, chief U.S. economist for Bank of America Merrill Lynch.

“That’s the part of the economy that is presumably most budget constrained, so they don’t necessarily have savings to draw down or lines of credit they can use,” she said. “An income shock in that population becomes a consumption shock more quickly and potentially more deeply.”

Efforts to fight the outbreak are likely to make the economic situation worse, at least in the short run.

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