Stock markets sell off as coronavirus spread threatens global economy

Stocks fell sharply Monday, following a sell-off in overseas markets, as a surge in virus cases and a worrisome spread of the disease outside China sent investors running for safety.

The Dow Jones Industrial Average lost 1030 points or 3.5 per cent to close 27,961. That's the worst day for the Dow in more than two years and enough to push the closely watched group of shares in 30 U.S. companies into negative territory for the year. 

The S&P 500 index fared slightly better, down 2.9 per cent or almost 100 points. The tech-heavy Nasdaq fell 3.7 per cent or 355 points.

In Toronto, the S&P/TSX Composite Index lost 276 points or roughly 1.5 per cent as the resource sector slumped because of concerns of a global economic slowdown.

More than 79,000 people worldwide have been infected by the new coronavirus. China, where the virus originated, still has the majority of cases and deaths. But, the rapid spread to other countries is raising anxiety about the threat the outbreak poses to the global economy.

South Korea is now on its highest alert for infectious diseases after cases there spiked. Italy reported a sharp rise in cases and a dozen towns in the northern, more industrial part of that country are under quarantine. The nation now has the biggest outbreak in Europe, prompting officials to cancel Venice's famed Carnival, along with soccer matches and other public gatherings.

There are also more cases of the virus being reported in the Middle East as it spreads to Iran, Iraq, and Kuwait, among others.

Germany's DAX slid 4 and Italy's benchmark index dropped 5.9 per cent. South Korea's Kospi shed 3.8 per cent and markets in Asia fell broadly.

Investors looking for safe harbours bid up prices for U.S. government bonds and gold. The yield on the 10-year Treasury note fell sharply, to 1.37 per cent from 1.47 per cent late Friday. Gold prices jumped 1.8 per cent.

"Stock markets around the world are beginning to price in what bond markets have been telling us for weeks — that global growth is likely to be impacted in a meaningful way due to fears of the coronavirus," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

The viral outbreak threatens to crimp global economic growth and hurt profits and revenue for a wide range of businesses. Companies from technology giant Apple to athletic gear maker Nike have already warned about a hit to their bottom lines. Airlines and other companies that depend on travellers are facing pain from cancelled plans and shuttered locations.

Crude oil prices plunged 4.4 per cent. Aside from air travel, the virus poses an economic threat to global shipping.

Technology companies were among the worst hit by the sell-off. Apple, which depends on China for a lot of business, slid 4.3 per cent. Microsoft slumped 3.3 per cent.

Banks were also big losers. JPMorgan Chase fell 2.7 per cent and Bank of America fell 3.9 per cent.

Utilities and real estate companies held up better than most sectors. Investors tend to favour those industries, which carry high dividends and hold up relatively well during period of turmoil, when they're feeling fearful.

Gilead Sciences rose 4.4 per cent and was among the few bright spots. The biotechnology company is testing a potential drug to treat the new coronavirus. Bleach-maker Clorox was also a standout, rising 2 per cent

The sell-off is hitting the market as companies near the finish of what has been a surprisingly good round of earnings. About 87 per cent of companies in the S&P 500 have reported financial results and profits are expected to grow by more than a half-percentage point when all the reports are in, according to FactSet.

In the eyes of some analysts, Monday's tank job for stocks means they're just catching up to the bond market, where fear has been dominant for months.

U.S. government bonds are seen as some of the safest possible investments, and investors have been piling into them throughout 2020, even as stocks overcame stumbles to set more record highs. A bond's yield falls when its price rises, and the 10-year Treasury has been in such demand that its yield has plunged to 1.36 per cent from roughly 1.90 per cent at the start of the year.

The 10-year yield on Monday touched its lowest point in three years, falling from 1.47 per cent late Friday, and it's close to its intraday record low of 1.325 per cent set in July 2016, according to Tradeweb. The 30-year Treasury yield fell further after setting its own record low, down to 1.82 per cent from 1.92 per cent late Friday.

Traders are increasingly certain that the Federal Reserve will cut interest rates at least once in 2020 to help prop up the economy. They're pricing in a nearly 95% probability of a cut this year, according to CME Group. A month ago, they saw only a 68% probability.

Of course, some analysts say stocks have been rising in recent weeks precisely because of the drop in yields. Bonds are offering less in interest after the Federal Reserve lowered rates three times last year — the first such cuts in more than a decade — and amid low inflation. When bonds are paying such meagre amounts, many investors say there's little real competition other than stocks for their money.

The view has become so hardened that "There Is No Alternative," or TINA, has become a popular acronym on Wall Street. Even with Monday's sharp drops, the S&P 500 is still within 4.2 per cent of its record set earlier this month.