Global markets sink on slowing growth, coronavirus fears; Dow drops 603

The Dow Jones industrial average fell 603 points or 2%, wiping out January's gains and launching the blue chips on their worst start since 2016. The Dow closed at 28,255. The Standard & Poor's 500 index and Nasdaq composite closed down 1.77 and 1.59%, respectively.

Stocks were hit from several sides. Delta Air Lines and American Airlines joined United and a large group of European carriers in suspending all service to China, as demand for service plummets and officials scramble to contain the spread of the disease.

On Thursday, the World Health Organization declared a public health emergency, after declining to do so the previous week. The pneumonia-like virus has infected more than 9,900 people in China and killed 213 and is spreading. The national Centers for Disease Control and Prevention reported the first person-to-person transmission of the virus in the United States, as the husband of a woman who contracted the virus in Wuhan was diagnosed with the illness. The United Kingdom and Russia both reported their first cases Friday.

The deadly coronavirus presents a threat to the global economy, as it paralyzes China's workforce and dampens its powerful manufacturing industry. It is forcing global firms with roots in the country to freeze operations and seek ways to reorient supply chains.

"There is a growing recognition that the coronavirus contagion is worsening, with more travel restrictions and the number of infected already exceeding the total infected by SARS," said Kristina Hooper, chief global market strategist for Invesco.

From an economic perspective, the outbreak's timing is especially punishing, dragging down growth prospects and taking a bite out of corporate earnings just when investors had hoped for a boost after the truce in the U.S.-China trade war. A Chicago report showing the weakest manufacturing in five years added to market woes on Friday.

The Dow and the S&P both finished January in negative territory. The Nasdaq is still up a comfortable 2% on the year, thanks to the big technology stocks that have propelled the last several years of the bull market.

The big U.S. energy companies, already hit by low oil prices due to oversupply, were the biggest drags on the Dow Jones industrial average Friday. Exxon Mobil and Chevron finished down 4% each, hitting 52-week lows after reporting disappointing earnings on Friday. Oil prices are expected to decline further due to a slowdown in demand from the economic implications of the coronavirus.

"The market's worry is all about consumer demand," said Scott Wren, global equity strategist at Wells Fargo Investment Institute. "If people stay home and don't go out and spend money, economic growth will really get hit."

China's markets are closed for the extended holiday, but Hong Kong's Hang Seng Index fell 0.5%. Europe's benchmark Stoxx 600 index closed at a loss of 1%. Britain's FTSE 100 was off 1.3% on the long-awaited official day of Brexit.

The tumult ushered U.S. markets' worst week of trading in 2020, a disappointing end to what otherwise had been a strong January that brought the Dow Jones industrial average within striking distance of 30,000. Ten of 11 S&P sectors finished in the red, with energy the biggest drag. 

Growth in the euro zone softened significantly last year, fresh economic data showed Friday, expanding just 1.2% in 2019, its lowest level in six years. Experts say the slowdown is tied to a weakening manufacturing sector and strife in the automobile industry, further complicated by global trade tensions.

U.S. economic growth dropped to its slowest pace since 2016 in 2019, the Commerce Department reported Thursday. The slowdown defies claims from the Trump administration that stimulus from the 2017 tax bill, which yielded big cuts for corporations and households, would lead to 3% GDP growth. Despite a 2.1% rise in fourth-quarter GDP, growth for the full year was 2.3%, compared with 2.9% in 2018 and 2.4% in 2017.

Consumer spending rose slightly, at 0.3%, in December, the Commerce Department reported Friday, while incomes inched up 0.2% and inflation picked up 0.3%.

"Consumers are not as positive as they were in the middle of 2019 and are sitting on their wallets as the year came to a close, which draws a great big question mark over the 2020 economic outlook," Chris Rupkey, chief financial economist at MUFG Union Bank wrote in a note to investors Friday. "Business investment spending on equipment and structures are declining which doesn't suggest companies think consumer spending will be all that red hot in 2020 and this is before the China virus has spread ... generating uncertainty that will keep the consumer at home instead of taking those trips to the mall that the economy sorely needs to keep growing."

Goldman Sachs in a research note on Thursday predicted the coronavirus will somewhat stifle U.S. economic growth in the first quarter. The investment firm said that a bigger outbreak in the United States could pose a significant risk to consumer spending and business activity. But in an interview with Fox Business on Thursday, Commerce Secretary Wilbur Ross claimed that the lethal virus could "help" the U.S. economy as businesses seek alternatives to China because of the health risks.

"I think it will help accelerate the return of jobs to North America," Ross said.

Experts have been exploring the 2003 SARS outbreak to weigh the potential economic impact of the coronavirus. A 2004 study from The Brookings Institution, Korea University and the Australian National University estimated that the outbreak delivered a $40 billion hit to the global economy; that would amount to about $56 billion today, adjusting for inflation.

Starbucks earlier this week shuttered more than 2,000 locations - more than half its stores in the country - and McDonald's and KFC have also announced closures. Google closed its five offices in mainland China, Hong Kong and self-governing Taiwan. The airline industry has been hit particularly hard, and on Friday Delta and American Airlines joined a large group of European airlines in suspending all flights to China. Delta's shares sank 2% and American Airlines' shares fell more than 3%.

Technology giants Apple, Microsoft and Amazon delivered blockbuster earnings beats this week. But their success was not enough to rescue markets from Friday's plunge over fears that the coronavirus was rapidly spreading across the planet. 

Moody's analysts predict the virus will eat into Apple's profits in the first quarter as the company freezes operations and looks to supply chain alternatives. Apple's shares fell 4.4% on the day. Microsoft closed down 1.5%. Amazon.com was up 7.4%. Washington Post owner Jeff Bezos is the founder and chief executive of Amazon.

"Though its current offerings appear to be popular in China, if the epidemic endures and causes a sustained weakening of economic activity, there could be material impacts to Apple's performance over an extended period," Moody's analysts wrote in a report Thursday. "Apple's large product-centric and consumer oriented sales make it susceptible to sharp swings in demand."

The virus scare has brought volatility back to the markets. Stocks moved 1% last Monday for the first time since October and then again on Friday. "It's not a free-for-all, and not a panic," said Howard Silverblatt of S&P Dow Jones Industries. "A pullback was expected. The virus has been the trigger. The question is how long does the virus scare continue and how much it impacts global supply chains."

Ivan Feinseth of Tigress Financial partners sees the virus scare as a potential opportunity for investors.

"History has shown that any selloffs in stocks driven by health scares have been short-lived and did little to change the upward ascent of stocks in the past," Feinseth said. "The S&P 500 gained 31% in 1997 even in the face of a combination of the Avian flu epidemic, the Asian financial crisis, the Russian sovereign debt default, and the collapse of Long-Term Capital Management."

But there are signs that the outlook for 2020 could be less robust than in the past three years. Caterpillar, a bellwether for the global economy, beat earnings estimates but reported an 8% decline in revenue year-over-year, citing "global economic uncertainty." Its shares were down 3%.

"We expect continued global economic uncertainty to pressure sales to users in 2020 and cause dealers to further reduce inventories," Chief Executive Jim Umpleby said in a statement.