Stock markets sell off again as global economy infected by coronavirus fear

Stock markets fell for the second day in a row on Tuesday, wiping out gains since the start of the year, as fear over the coronavirus is spreading even faster than the virus itself.

The Dow Jones Industrial Average closed down 879 points or just over three per cent to 27,081. The technology-focused Nasdaq was off by almost as much, 255 points or 2.7 per cent, while in Toronto the TSX/S&P Composite Index was off by 385 points or just over two per cent to 17,177. In terms of points, it was the worst day for the TSX since August 2015.

The sell-off came a day after an even worse swoon on Monday, as investors digest the possibility that the virus that causes COVID-19 has the potential to disrupt the global economy by knocking out supply chains and reducing consumer demand for a range of goods and services.

On Tuesday, Iran reported 95 new cases and 15 new deaths from the coronavirus that started in China, while Italy is also seeing a growing cluster of new cases. 

"For the first time in a while we're finally waking up to the fact that this issue could go on for a while, and have a significant impact on Chinese and global economic growth and potentially the United States," said Randy Frederick, vice-president of trading and derivatives for money manager Charles Schwab.

"When people react to it because they don't travel or go to restaurants or go shopping, that'll have an immediate impact on the economy. It depends how long it goes and how wide the spread."

Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said each new country's outbreak adds to the fear. "It's the combination of South Korea, Japan, Italy and even Iran" reporting virus cases, Ma said.

"That really woke up the market, that these four places in different places around the globe can go from low concern to high concern in a matter of days, and that we could potentially wake up a week from now and it could be five to 10 additional places."

The two day sell-off on the Dow Jones is the worst two-day performance for the Dow since 2015.

After a multi-year bull run, the sell-off has pushed almost every major stock index in the world into negative territory for the year.

Just about every sector is down this week. 

"It's a case of which ones went down more, and which ones that went down less," said Colin Cieszynski, chief market strategist at SIA Wealth Management in Toronto.

Companies tied to travel and tourism are especially hard hit. Air Canada, for example, was down six per cent to $36.45 a share on Tuesday and down 27 per cent since the middle of January. The airline announced Tuesday it has cancelled all of its flights to China until April 10.

Shares in cruise lines are sharply lower. Norwegian Cruise Lines lost seven per cent of its value on Tuesday and is down by more than a third since the middle of January. Its rival, Carnival Cruise Lines, lost another six per cent on Tuesday and it, too, is down by more than 30 per cent in barely more than a month.

"With travel slowing down we've seen an impact on the airline sector, on the hotels and casinos, on cruise lines and ... where people would gather in a public place," Cieszynski said.

Oil prices have plunged as the virus has prompted fears that the global economy will require less energy to run as it slows down.

The benchmark oil price, known as West Texas Intermediate, dipped below $50 US a barrel on Tuesday, a level it hasn't dropped to since late 2018.

That hit Toronto's stock exchange hard as the TSX is home to a lot of energy names.

Conversely, Canada's main stock index was buoyed by rising prices in gold mining companies. The price of gold has risen to more than $1,600 US an ounce this month, a level it hasn't topped since 2013, because gold is seen as a safe haven in times of uncertainty.

"In Canada we will often see on days when the broader markets are taking a big hit, we'll often see strength in the gold price and gold stocks," Cieszynski said.

"That often will help to cushion the blow a little bit in Canada relative to the United States." 

While most industries have been hit hard by virus fears, there are some bright spots moving in the opposite direction because of the flip side of those same fears.

Drug companies working on possible vaccines are seeing their share prices rise, including one called Moderna that is up by almost 17 per cent on Tuesday because it has sent a possible coronavirus vaccine to a clinical trial to be tested on humans.

The fears of the coronavirus derailing the world's economy come at a time when another closely watched economic indicator — earnings at Canadian banks — suggest that Canada's economy is doing well.

Royal Bank of Canada reported strong earnings on Monday, and rivals BMO and Scotiabank followed that up with higher profits of their own on Tuesday. Despite the relatively strong showings, shares in all three banks were lower on Tuesday.