The coronavirus outbreak ended one of the longest winning streaks in market history 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%. That brought the decline from its most recent peak to more than 20%, 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% for the day, although down less than 20% from its peak less than a month ago.
The full economic toll of the outbreak — now officially a pandemic — 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 Donald 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% 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 since then, however, as the virus has spread more widely in the United States and as the effects around the world have become more pronounced.
Italy on Wednesday ordered almost all businesses nationwide to close after earlier travel restrictions failed to contain the virus. Chancellor Angela Merkel of Germany said Wednesday that as much as 70% of her country’s population was likely to become infected. The World Health Organization officially declared the outbreak a pandemic, acknowledging its worldwide scope.
The United States, unlike Europe, was on fairly firm economic footing before the virus hit. Unemployment was near a five-decade low, consumer spending and the housing market were strong, and overall growth was slowing but still solid. That should give the economy some cushion.
But cracks were showing. The trade war with China hurt manufacturers and farmers, leaving the economy even more dependent on consumer spending. The Federal Reserve last year cut interest rates three times to try to keep the expansion on track.
“The economy was already on its back heels coming into this year,” Zandi said. “All it was going to take was a shove to put the economy on its back, and it just got a body blow.”
Top Wall Street executives, summoned to a Wednesday meeting with Trump, said the banking system was strong enough to withstand the recent turmoil.
“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.”
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 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% 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 Trump’s tenure in office, according to a new 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 decadelong economic expansion.
The drop in confidence is not yet dire: More people (39%) expected very good or somewhat good business conditions in the coming year than those who expected very bad or somewhat bad conditions (22%). But sentiment could be shaken further by the continuing financial turmoil. The poll was conducted last week and completed Sunday, before stock markets dropped 8% 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 effect 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.
The experience in other countries offers lessons for the United States. China appears to have been able to get its outbreak under control, but only through shutting down vast regions of the country. South Korea has won plaudits for its decisive response, but that too required huge disruptions to daily life and commerce.
“The virus is beatable, but the measures that are required to beat it are economy killers,” said Ian Shepherdson, chief economist for Pantheon Macroeconomics, a research firm.
The only way to kick-start the economy after such a vast disruption, Shepherdson said, was through a “blockbuster fiscal response.”
There is little evidence so far that such a response is coming. Trump is proposing a temporary elimination of the payroll tax, a measure with a big dollar figure — it could cost nearly $1 trillion — but that would put only a trickle of extra cash into workers’ bank accounts. For people who lose their jobs as a result of the outbreak, a payroll tax cut wouldn’t help at all.
Democrats are preparing their own plan featuring paid sick leave for affected workers as well as breaks on federal student loans and mortgages, block grants to help communities, and assistance to help public transit systems stay in operation. Negotiations between the parties have hardly begun.