Tuesday, August 04, 2020

Euphoric year for stocks falls apart with outbreak pummeling S&P

Feb 24. 2020
A Wall Street street sign hangs in front of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, April 18, 2016. Photographer: Michael Nagle/Bloomberg
A Wall Street street sign hangs in front of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, April 18, 2016. Photographer: Michael Nagle/Bloomberg
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By  Syndication Washington Post, Bloomberg · Jackie Edwards, Vildana Hajric · BUSINESS, WORLD, US-GLOBAL-MARKETS 

The warnings were out there. It was coming too easy in the S&P 500. Records fell once every two days, valuations had swollen and each dip found buyers. That confluence was in danger of coming asunder Monday.

In a market that has posted only two back-to-back drops all year, indexes were at risk of their first three-day decline since early December, with the losses threatening to wipe out about four-fifths of the year-to-date rally in the benchmark gauge for American equities. Investors who for two months had looked past every threat to the markets abruptly turned bearish on rising concern the spread of the coronavirus will upend global economic growth.

They are reprising a pattern that has prevailed in U.S. markets for almost a year, in which periods of near-euphoric gains are intermittently broken by sharp reactions to outside threats. Futures are pointing to declines that would leave equities down almost 4% since Wednesday as the deadly virus spread in countries including Italy and Iran.

High valuations may be exacerbating losses. The S&P 500 started last week trading at more than 22 times earnings while the Nasdaq 100 Index's multiple was nearly 30, both among the highest in decades. Beyond coping with an increasingly extensive human toll, equity traders have struggled to estimate the outbreak's impact on global economies and supply chains.

"World stock markets are not priced well for a decline in earnings that will surely come as the world's factory in China is seeing unprecedented upheaval," said Chris Rupkey, chief financial economist for MUFG Union Bank. "Until investors get a better read on when China is coming back on line, it's clearly sell now and see what happens later."

U.S. stock index futures slid, with S&P 500 March contracts down 2.5% at 7:39 a.m. in New York, after a raft of new coronavirus cases in numerous countries outside China renewed concern about the ability of the illness to spread.

China's coronavirus cases rose to at least 76,936 over the weekend, with a total of 2,442 fatalities. South Korea raised the country's infectious-disease alert to the highest level after a 20-fold increase in cases. Italy -- the virus's epicenter in Europe, with 140 infections -- canceled the Venice Carnival and other events. Turkey will temporarily close its border with Iran, which with 43 infections has the most cases in the Middle East, including eight fatalities.

"The virus spreading to Italy and Iran is finally spooking some investors on what has mostly been a mostly Asian situation," said Rick Bensignor, the founder of Bensignor Group and a former strategist for Morgan Stanley. "It's not a question of if it comes to the U.S., but when, and perhaps investors are finally realizing that."

The S&P 500 fell 1.1% on Friday after a major piece of U.S. economic data showed a sizable hit from the epidemic. U.S. business activity fell in February for the first time since 2013 as the outbreak made firms hesitant to place orders.

"This escalation has had investors reverse their previous opinion that it would be a temporary economic problem," said Michael McCarthy, chief market strategist at CMC Markets.

Nomura Securities International Inc. cross-asset macro strategist Charlie McElligott had cautioned in a note Friday that e-minis below about 3,325 was "where things could begin to get slippery." That's the level at which he said gamma would flip to the downside for options dealers, so they might add to pressure on the index.


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