AP Analysis: Investors ‘guessing’ on virus, assuming worst

WASHINGTON — No one knows where the coronavirus will show up next, whether authorities can contain it or how much damage it will leave behind. But professional investors aren’t taking any chances.

Spooked by uncertainty over the outbreak and an ill-timed oil war between Russia and Saudi Arabia, panicked Wall Street traders dumped stocks Monday, turning a steady retreat into a full-blown rout in the worst burst of selling since the 2008 financial crisis. Seeking safety, they poured money into U.S. Treasurys and sent benchmark interest rates to astonishing lows.

“Everyone is guessing and assuming the worst,” said Robin Brooks, chief economist at the Institute of International Finance, a global banking association.

The Dow Jones Industrial Average plummeted nearly 8% as American stocks moved closer to bear market territory.

Even so, financial advisers doled out this advice to ordinary investors: Remember your long-term goals and resist the urge act rashly.

Financial markets have been alarmed by the speed with which COVID-19 broke out of China and spread around the world. The virus has infected nearly 114,000 people in 111 countries and regions and killed almost 4,000. Italy is trying to lock down 16 million people in its northern region, its business centre, and appears all but certain to fall into recession, perhaps leading other European countries into a downturn.

Raising anxiety are troubling unknowns: How fast will virus continue to spread? How deadly will it prove to be? Are policymakers up to the task of bringing it under control? Will the measures they take — including massive quarantines — stifle economic growth?

“Uncertainty is very high. We know what uncertainty does to markets,” said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics. “It’s a crisis that’s right here, right now, and it’s global.”

Adding to the tumult, oil prices cratered Monday after Saudi Arabia vowed to boost production, giving up efforts to hold off and prop up prices. That’s bad news for countries and companies that need higher oil prices to balance their budgets, pay their debts or make a profit.

Here is what investors need to know about the action in the markets Monday:

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IS THE BULL IN DANGER?

It was 11 years ago that recession-driven declines in the stock market stopped and the current bull market began it’s record run. But Monday was hardly a happy birthday.

The S&P 500 dropped 7.6% and is 18.9% below its most recent record, set last month. If that decline extends to 20%, the bull market will be dead and the bear market will be in full growl. The last bear market ran from October 2007 to March 2009 and the S&P 500 dropped nearly 57%. The average bear market since 1929 has lasted 21 months and shaved 39.9% off the S&P 500, according to S&P Dow Jones Indices.

Whether the current slump becomes a bear market most likely depends on how much the virus outbreak slows global economic growth.

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RECESSION AHEAD?

Economists are scrambling to downgrade their economic forecasts. The virus — and the policies designed to combat it — are taking a toll on commerce. Flights have been cancelled and trade shows called off. Millions of people are locked down in their homes.

The market turmoil could make things worse by undermining the confidence of American consumers, the driving force behind a record-breaking U.S. economic expansion that is in its 11th year.

The Institute of International Finance now says the global economy may grow only 1% this year — essentially a recession — down from 2.6% in 2019 and its weakest performance since the financial crisis. The institute slashed its 2020 forecast for U.S. growth to 1.3% from 2% and the outlook for China to just below 4% from the 5.9% it had previously expected.

Meanwhile, the Federal Reserve is trying to limit the damage. Last week, the Fed cut its benchmark short-term interest rate by a half point, its biggest move since the crisis year 2008. On Monday, it stepped up the short-term lending it conducts on a daily basis from at least $100 billion a day to at least $150 billion. Those loans help businesses meet short-term financing needs, including issuing paychecks.

“Short-term funding had started to freeze up a bit and you don’t want that to mutate into a full-blown financial crisis,” said Diane Swonk, chief economist at Grant Thornton. “When the economy falters, the Fed has one mandate — to support economic growth. The fundamentals of the economy have shifted, and the Fed has to respond.”

Economists worry that the Fed and other central banks can’t do much more to help. After cutting its benchmark interest rate to a range of 1% to 1.25% last week, the Fed doesn’t have much room to cut.

And the unconventional approach the Fed took during the financial crisis — buying up bonds to push long-term rates lower — doesn’t offer much stimulus when long-term rates are already at record lows.

Mark Zandi, chief economist at Moody’s Analytics, said that Congress should consider passing a $100 billion package to provide emergency unemployment benefits for people who can’t work because of virus-related shutdowns. The funds would also cover medical costs of people who get the virus and who do not have adequate insurance coverage.

“If Congress gets this together quickly, it would help to soothe frayed nerves from the falling markets,” Zandi said.

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FLIGHT TO SAFETY

Interest rates on a range of U.S. government bonds have plunged to all-time lows as investors seeking relative safety from stocks have furiously snapped up Treasuries. (As the price of a bond goes up, its interest rate, or yield, declines.)

The yield on the 10-year Treasury — a benchmark for mortgages and other consumer debt — was 1.9% as recently as Dec. 24. On Monday, it dipped to 0.34% per cent before finishing the day at 0.498%.

The shrunken bond yields will also make it harder for those who invest in them to earn much income: The return on the benchmark 10-year Treasury note is now less than half the inflation rate. After adjusting for inflation, an investor who buys a Treasury will effectively lose money over the course of the loan.

On the positive side of the ledger, low or negative interest rates can make it easier for companies and consumers to borrow, stimulating economic activity.

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OIL SLICK

Anyone pulling up to a gas station to find lower prices than their previous fill-up might wonder why sharply lower oil prices would be a bad thing.

Lower prices at the pump, however, aren’t necessarily good for the U.S. economy overall. When energy prices fall, energy companies tend to cut back on investment and jobs. JPMorgan’s chief global strategist, David Kelly, warns that “capital spending on energy infrastructure could take a major hit.” A free fall in gasoline prices led to a sharp drop in U.S. business investment in 2016, for instance — one reason the country’s economic growth slowed to 1.6% that year from 2.9% in 2015.

Oil fell nearly 25% Monday, its sharpest decline since 2008 when employers were slashing hundreds of thousands of jobs in the U.S. Behind the plunge: Saudi Arabia and Russia deadlocked about whether to cut production to prop up prices.

Even before the virus outbreak threatened global growth, demand for oil was suppressed by U.S. trade tensions with China, concerns about climate change, growing adoption of renewable energy sources and steadily improving energy efficiency.

In the past five years, 208 oil producers have filed for bankruptcy protection after racking up about $121.7 billion in debt, according to law firm Haynes and Boone.

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DON’T PANIC

The urge to sell your stocks or at least reshuffle your portfolio intensifies when markets are in turmoil. But while professional investors make big-money moves trying to stay ahead of the market, the advice for retail investors is to stick to their plan.

Investments in the stock market are usually done as part of a long-term plan. Any money you need in the next few years shouldn’t be in stocks anyhow.

Experts say the best route for most people who are holding stock for their long-term goals is to ride out the downturn. Those nearing retirement hopefully don’t have everything tied up in stocks but should reach out to a professional for the best advice for their situation.

For those who just can’t sit still, it may be a good time to rebalance your portfolio to make sure you have the asset mix you want. And if you need to sell some stock to sleep at night, make some minor adjustments.

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Paul Harloff in New York contributed to this story.

Paul Wiseman And Martin Crutsinger, The Associated Press