By The Washington Post · Taylor Telford, Thomas Heath · BUSINESS, US-GLOBAL-MARKETS
"The floodgates are opening," said Invesco chief market strategist Kristina Hooper in an email after the market's close. "Companies are beginning to warn that the coronavirus outbreak will impact earnings and stocks have begun to react negatively."
China accounts for roughly 20% of global gross domestic product. The nation has been hit hardest as the epicenter of the outbreak, with more than 72,000 cases. The epidemic has forced the country into lockdown and idled its manufacturing industry, a vital supplier to companies everywhere.
The virus had killed more than 1,800 people worldwide as of Monday, leading to supply chain disruptions, tourism and travel drops, and widespread store closures that are challenging global firms and stalling growth at a time when it was expected to rebound thanks to the U.S.-China trade truce. Experts now predict the global economy will shrink this quarter, the first time since 2009.
"Markets have been far too complacent about how China's woes would have a direct impact on supply chains for a large number of companies around the world," Russ Mould, investment director at AJ Bell, said in commentary Tuesday. "If factories are closed, are running at partial capacity, or are struggling to get raw materials to make goods, then it is no wonder that supplies will be disrupted."
The Dow Jones industrial average declined for the third day in a row after hitting record highs last week. The Dow closed at 29,232 on Tuesday, down 165 points, or 0.56%, after bouncing back from a 300-point fall earlier in the day. Walmart was the Dow leader, gaining 1.48% on the day after it announced a hefty dividend increase. Dow Inc., Goldman Sachs Group and Intel - along with Apple - were the big drags on the blue chips as 24 of the index's 30 components finished in the red.
The Standard & Poor's 500 stock index closed down about 10 points, or 0.29%, to finish at 3,370. Utilities, communication services and consumer discretionary sectors were the only positive industries among the 11 sectors in the S&P. Financials, energy and industrials were the big losers. The tech-heavy Nasdaq composite index closed the day just a hair inside the plus column after Apple cut its losses. Tech stars Google-parent Alphabet and Microsoft surged. Europe's benchmark Stoxx 600 index finished down 0.38% on the day. Hong Kong's Hang Seng closed down more than 1.5%.
Some investors took heart from the late rally by Nasdaq and Apple.
"Those betting on a major stock market decline may be making a losing bet," said Peter Tanous of Lynx Investment Advisory. "While the virus has infected many thousands of people, the death rate among those inflicted is just over 2%, which means that 98% of those who get it survive."
The coronavirus has slammed China's economy, diminishing its oil consumption and disrupting the careful symmetry between global supply and demand. U.S. benchmark crude and Brent crude were trading at about $52 and $57 per barrel respectively, far lower than what oil companies and major supplier nations prefer. BP has warned that the virus could reduce global oil demand by as much as 40% this year.
Gold, a safe haven, climbed more than 1%, to $1,605 an ounce.
Moody's Investors Service on Tuesday cut its 2020 forecast for China growth from 5.8% to 5.2% to reflect the outbreak's "severe but short-lived" impact that would probably spill into neighboring Asian economies.
"Our baseline assumption is that the economic effects of the coronavirus outbreak will continue for a number of weeks before tailing off and allowing normal economic activity to resume," Christian de Guzman, a Moody's Senior Vice President, said in the report.
Apple, which counts on greater China for nearly a fifth of its revenue, warned investors Monday that it is experiencing an iPhone supply shortage as Chinese factories have been slow to come back to life. The tech giant, whose success over the last decade has been tethered to its ability to harness China's massive labor force and sprawling network of component manufacturers, also said demand for its products in China had been significantly hurt by store closures. The few stores that have remained open are operating on reduced hours "with very low customer traffic." Apple's shares were down 2 percent in premarket trading.
"This unexpected news confirms the worst fears of the Street that the virus outbreak has dramatically impacted iPhone supply from China/Foxconn with a demand ripple impact worldwide," Dan Ives, managing director of equity research for Wedbush Securities wrote in a research note Monday. "While we have discussed a negative iPhone impact from the coronavirus over the past few weeks, the magnitude of this impact to miss its revenue guidance midway through February is clearly worse than feared."
Other major companies are warning that the virus could take a bite out of their earnings. Tesla cited "health epidemics" as a risk last week, and Chinese e-commerce giant Alibaba called the outbreak a "black swan" event. Nike, which has closed half its stores in China, said the outbreak will have a "material impact" on its operations in the country. Disney has said it could take a $175 million hit in operating income if its theme parks in China are shuttered for the next two months, and manufacturing giants General Motors, Toyota and Airbus have all warned of slow returns to production.
China's massive aviation market - which is poised to eclipse the U.S. this decade to become the world's biggest, saw its capacity shrink by nearly 80 percent between January 20 and February 17, according to OAG Aviation Worldwide. More than 40 airlines around the world have cut or halted service to China because of the outbreak.
"No event that we remember has had such a devastating effect on capacity as coronavirus," John Grant, senior analyst at OAG, wrote in a recent report. "In many ways it highlights the importance of the Chinese market to aviation and the rapid globalization of air services as new markets and travelers emerge."
Walmart piled onto Wall Street's woes with its fourth-quarter earnings miss Tuesday, with the retailer reporting slowing e-commerce growth and weakening demand for toys and apparel during the holiday shopping season. It also offered a fiscal 2021 earnings outlook that was below analyst expectations and warned that the situation in China could seep into its struggles.
"Currently, we do anticipate some financial impact to the China business in Q1 and potentially Q2," chief financial officer Brett Biggs told reporters Tuesday.
Walmart's shares were up 0.6 percent in premarket trading.