Dow is back down 1,600 points as Fed intervention causes just a temporary respite from selling

FAN Editor

U.S. stocks recovered some of their steep losses on Thursday after the Federal Reserve announced extraordinary funding actions of more than $1 trillion to ease strained capital markets in the wake of the coronavirus sell-off.

The Dow Jones Industrial Average sill traded more than 1,100 points lower, or 5.7%, following the Fed’s action. The Dow was down as much as 9.5% at its low point, which would be its worst drop since the 1987 market crash.

The S&P 500 traded down 4.4%, joining the Dow in a bear market on Thursday. The main U.S. stock benchmark is now down 22% from its record set just last month. At one point, however, the S&P 500 was down more than 9%. The Nasdaq Composite recovered slightly, trading about 4.5% lower after plummeting more than 7%.

The Fed announced it will ramp up its overnight funding operations to more than $500 billion on Thursday. It will then offer more repo operations totaling $1 trillion on Friday. The Fed also expanded the types of securities it would purchase with reserves. 

“These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak,” said the statement from the New York Federal Reserve, which conducts these operations on behalf of the Fed.

Stocks have been under pressure since President Donald Trump failed to quell concerns over the possible economic slowdown stemming from the coronavirus. Traders have been waiting for more action by the White House and the Fed.

“The coronavirus is scary and people don’t know what to expect,” said Kathy Entwistle, senior vice president of wealth management at UBS. “It’s like the tsunami is coming. We know it’s going to hit any day and nobody knows what the outcome is going to be.”

It got so bad, that trading was halted briefly after the open for 15 minutes as markets hit the mandated “circuit-breaker” threshold used by U.S. exchanges. The Dow, at one point, was on pace for the sixth-worst decline in its history, according to FactSet. Even the worst one-day drop of 2008 financial crisis did not reach this magnitude. 

Not much was immune to the market plunge. Small-cap benchmark the Russell 2000 index cratered by 10%. Gold fell. Oil plunged. Credit market spreads widened significantly. Only U.S. Treasuries were higher. Even bitcoin dropped.

We are going into a global recession,” said Mohamed El-Erian, chief economic adviser at Allianz, on CNBC’s “Squawk Box.” “After what’s been happening the last few days, we are going to see a spread of economic sudden stops.”

“The trouble with economic sudden stops is it’s not easy to restart an economy,” El-Erian said. He believes the selling won’t stop until the bear market hits down 30%.

In his address, Trump announced travel from Europe will be suspended for 30 days as part of the government’s response to the coronavirus outbreak. Trump also said the administration would provide financial relief for workers who are ill, caring for others due to the virus or are quarantined. 

These moves were not specific enough for investors, however, who were looking for a more robust fiscal response to curb potentially slower economic growth stemming from the coronavirus.

“President Trump in an extraordinary Oval Office address didn’t offer up major new ideas on stimulus and only said he’d propose a vague payroll tax holiday to Congress without strongly standing up for any firm size/magnitude,” wrote Ernie Tedeschi, policy economist for Evercore ISI, in a note. “This effectively kicks the issue to Congress which is still planning to go on recess next week.”

Cruise line shares dropped sharply. Royal Caribbean traded 26.6% lower while Carnival and Norwegian Cruise Line slid 19% and 27.6%, respectively. Airline shares such as United, Delta and American all fell more than 12%. 

The Cboe Volatility Index (VIX), widely considered the best fear gauge on Wall Street, jumped to more than 67 and hit its highest level since 2008.

On Wednesday, the Dow ended its historic 11-year bull market run by closing in bear-market territory. A bear market marks a 20% decline from all-time highs. Now the S&P 500 is in one.

Trading was halted for 15 minutes shorty as an initial 7% drop triggered “circuit breakers” at the New York Stock Exchange and Nasdaq. Before the open, futures contracts overnight tied to the major indexes fell to their so-called limit down thresholds, sliding 5%. These limit down levels act as a floor for selling until regular trading begins. They are used to ensure orderly markets.

Also causing concern about how pervasive the virus could already be in this country was the announcement Wednesday that the National Basketball Association is suspending its season after a Utah Jazz player tested positive for coronavirus. Movie actor Tom Hanks and his wife, Rita Wilson, also said they tested positive for the coronavirus.

“The crux of the angst investors are feeling as the coronavirus spreads surrounds what might happen to consumer spending,” wrote Scott Wren, senior global market strategist at Wells Fargo Investment Institute.

“Consumers sitting at home and not out spending money because they fear catching the coronavirus is the ultimate negative outcome,” he added. “It has been the U.S. consumer who has been driving the recovery bus during this long expansion.”

Thursday’s plunge came after yet another wild session on Wall Street and the demise of the Dow’s record-setting bull market run that began in March 2009. The blue-chip index tumbled 1,464.94 points, or 5.9%, to close at 23,553.22. The 30-stock average closed in a bear market, putting to end an expansion that started in 2009 amid the financial crisis.

The S&P 500 and Nasdaq Composite fared slightly better on Wednesday, down 4.89% and 4.7% respectively. Those two indexes also remain just outside of bear market territory albeit down at least 19% from their respective record closes. 

“These markets have been impossible to predict,” said David Lafferty, chief market strategist at Natixis Investment Managers. “I think of them as kind of wind-sock markets. They’re just changing with whatever way sentiment is. There’s no fundamentals under these markets right now.”

Investors continued to blame the spread and economic impact of the coronavirus for the last month’s steep losses. The virus, which has now infected more than 124,000 people worldwide and killed at least 4,589, threatens to disrupt countries like Italy that have taken aggressive action to slow its spread. 

Italian Premier Giuseppe Conte announced late Wednesday that all the country’s stores except pharmacies and groceries will be closed in a move deemed both necessary to safeguard human health and a threat to the country’s output.

Wall Street worries that such measures could tip the global economy into recession, especially if Washington decides the disease is rampant enough in the U.S. to warrant similar measures. The World Health Organization declared COVID-19 a pandemic earlier on Wednesday.

CNBC’s Eustance Huang contributed to this report.

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