The broader Standard & Poor’s 500-stock index fell into a bear market, defined as falling 20 percent from a prior high. In an epic day-long rout, European markets suffered similar declines, with exchanges in Paris and Frankfurt shedding more than 12 percent and London’s FTSE index losing nearly 11 percent.
As investors struggled to cope with declines across multiple markets, few saw any early end to the bloodletting. One reason: Although the Federal Reserve has cut interest rates and the White House and Congress are working toward a stimulus, these actions fall short of the shock-and-awe response to the virus necessary to calm investors. Some analysts called for more aggressive rate cuts and fast, new public spending to reverse the downdraft.
“The policy flops are mounting,” Ryan Sweet, director of real-time economics for Moody’s Analytics, wrote in a note to clients.
The latest plunge began Wednesday night, as Trump started outlining his policy response to the epidemic in a widely criticized Oval Office speech, and accelerated once trading opened Thursday in New York. Even the Federal Reserve’s promise to make available $1.5 trillion to smooth the operations of the giant U.S. Treasury market could not calm anxious investors.
Across the United States, meanwhile, the virus forced schools, sports leagues and entertainment venues — including American icons — to alter their plans.
The NCAA canceled “March Madness,” its premier annual showcase, disappointing millions of fans. Major League Baseball and the National Hockey League likewise placed their seasons in limbo joining the National Basketball Association, which acted one day earlier.
Public tours of the White House have been canceled and the U.S. Capitol and congressional office buildings will be off-limits to tourists starting April 1.
Even Mickey Mouse was sidelined when Disneyland said it would close through the end of this month.
In Maryland, Gov. Larry Hogan (R) ordered public schools to close for two weeks starting Monday and banned gatherings of more than 250 people. Schools in Ohio, New Mexico and Michigan will close for three weeks, and Kentucky Gov. Andy Beshear (D) called for all schools in the state to suspend in-person classes for two weeks. And in Virginia, Gov. Ralph Northam (D) declared a state of emergency, but left school closings to local officials.
Still, at the White House, the president continued to minimize the danger from the virus. The president said he was unfazed by reports that a Brazilian official he had met at Mar-a-Lago last weekend, Fabio Wajngarten, later tested positive for the coronavirus.
“Let’s put it this way: I’m not concerned,” the president said when asked about having been exposed to the Brazilian official, who was photographed standing alongside him and Vice President Pence.
If Thursday’s cascade of cancellations was notable, it was the financial markets that offered an unmistakable verdict on the response by major U.S. and global institutions to the virus.
Wall Street’s stunning meltdown over the past month has erased almost all of the stock market gains since Trump’s November 2016 election. On Feb. 12, the Dow was up more than 61 percent since his surprise win. Now the total Trump-era gain is around 11 percent.
Thursday’s decline reflected investor unease with the handling of the crisis by global leaders including European Central Bank President Christine Lagarde and Trump and the emergence of structural problems in financial markets that were overlooked during a record 11-year economic expansion.
“It’s primarily the response to bad or absent leadership, particularly on the public health front, and unhelpful statements by the Trump administration, ECB and others that’s fundamentally what’s driving this,” said Adam Posen, a former member of the Bank of England’s rate-setting committee.
Lagarde sparked a sell-off in Italian government bonds with an offhand remark Thursday that the ECB was not worried about rising funding costs for some euro-zone governments. She later modified her comments in a subsequent interview with CNBC. Likewise, the White House late Wednesday needed to issue a clarification after Trump misstated the details of his policy response to the virus in an Oval Office speech.
Malfunctioning markets were the target of an extraordinary action Thursday by the Federal Reserve Bank of New York. It said Thursday that it was injecting $1.5 trillion into the bond market on Thursday and Friday to ensure the short-term funding markets that banks use to lend to one another operate smoothly. The New York Fed said it acted “pursuant to instruction” from Fed Chair Jerome H. Powell.
The action was both financially esoteric — the sort of operational consideration that only bond traders might appreciate — and profoundly important for the health of Americans investments. The roughly $17 trillion Treasury market is the safe haven for investors who want a near-absolute guarantee that they will get their money back. It also operates as a benchmark against which all other assets — stocks, corporate bonds, municipal bonds and commodities — are priced.
“The belief that the Treasury is a risk-free asset is the bedrock of global financial markets,” said Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis. “Once you start to lose that, you lose an anchor that isn’t easily replaced."
The Fed also announced it will buy $60 billion worth of Treasury bonds for the next month, from March 13 through April 13, to help keep that market functioning appropriately. Earlier this week, investors reported problems trading in U.S. government bonds. These irregularities echoed the types of freezes seen during the 2008 financial crisis and the Fed appeared to want to act quickly to stop them.
“It’s safe to say, the Fed almost never does what it did the past two weeks,” said Peter Conti-Brown, a Fed historian and associate professor at the Wharton School of the University of Pennsylvania. “The Fed has unlocked its emergency tool kit.”
But others said the market dysfunction showcased a fragility in the system resulting from some of the regulatory changes that were introduced in the wake of the 2008 financial crisis.
Lawmakers required banks to hold more capital in reserve, which buffered them against most shocks. As trading volumes have exploded over the past decade, however, the changes also have made banks risk averse. In some corners of the financial markets — such as the overnight “repo” market for bank-to-bank loans — the result in recent days has been a shortage of willing buyers, experts said.
And to cope, some said, the Fed needs to reinstate its crisis-fighting playbook from 2008.
“We just need a really bold response,” said Hal Scott, a Harvard Law School professor who heads the nonpartisan Committee on Capital Markets Regulation. “The spread of the virus is shutting down the economies of these countries. Take Italy — the economic system is not functioning. We could be there."
Trump has bashed Powell for acting slowly in the face of plunging markets and recession fears from the coronavirus outbreak.
But along with the Fed, investors are looking to Congress — with increasing desperation — for an aggressive response to the economic threat. “There has to be a fiscal response,” Posen said.
The Dow plummeted nearly 1,700 points, but it was the S&P 500′s 7 percent slide that triggered the circuit breaker — a 15-minute break to stop the free-fall and give traders time to recalibrate. The cool-down was temporary, though, with the blue-chip index sinking more than 2,200 points before rebounding slightly. By midday, it was down more than 1,800 points, or 7.8 percent, while the S&P 500 was off 7.2 percent and the tech-heavy Nasdaq down nearly 7 percent.
The New York Stock Exchange activated the rarely used lever as the coronavirus’s accelerating spread and worsening economic outlook have rattled global markets for weeks. Futures markets tumbled overnight after Trump announced the travel ban — a move that blindsided European officials.
On Monday, the S&P 500 triggered the first circuit breaker after falling 7 percent early into the session. By the end of day, it had shed 7.6 percent and the Dow had lost a stunning 2,014 points, or 7.8 percent. The markets recovered somewhat Tuesday, posting across-the-board gains, only to recoil Wednesday after the World Health Organization declared the coronavirus a pandemic. The Dow cratered nearly 1,500 points to fall into a bear market, which marks a 20-percent drop its all-time high.
Thursday’s decline recalled 1987’s “Black Monday,” still the largest one-day Dow drop in percentage terms. Stocks fell 22.6 percent that day with the sell orders coming so quickly that they overwhelmed the computer and phone systems at the New York Stock Exchange. It took the market two years to recover the lost ground.
The pneumonia-like illness has spread to every continent save Antarctica since it first emerged in China late last year, sickening more than 120,000 people and claiming thousands of lives. The United States has more than 1,500 confirmed cases and 41 deaths.
The White House and Congress are at odds over what type of economic rescue package to assemble. The Trump administration has pushed the idea of new tax cuts and delayed tax filings as a way to boost the economy, as well as expanding sick leave benefits and helping the airline, hotel and cruise industries. Democrats are moving ahead in the House of Representatives with a plan to expand unemployment insurance, provide more sick leave, and assure food benefits are available for people who lose their jobs and need emergency assistance.
“The bad news for the travel, entertainment, leisure, and energy industries resulting from the virus fears, initial unemployment claims are likely to move higher soon,” Ed Yardeni, president of Yardeni Research, wrote in commentary Thursday. “Measures of consumer and business confidence are likely to drop sharply soon as well. A recession isn’t inevitable, but it certainly is becoming more likely. ”
Before Thursday, the Dow has closed a single-day session down at least 7 percent on 20 occasions since 1896, according to Howard Silverblatt of S&P Dow Jones Indices.