Why it took until now for US markets to flip out over the coronavirus

NEW YORK (NYTIMES, BLOOMBERG) - Less than a week after global markets largely shrugged off a warning from Apple that the coronavirus was posing a bigger hit to sales and production than previously expected, US indexes finally imploded on Monday (Feb 24).

The S&P 500 index, which had reached a record high as recently as Wednesday, fell 3.4 per cent, its worst single-day performance since February 2018. As analysts issued new warnings that the outbreak could drag down economies around the globe, stocks fell enough to wipe out all of the index's gains for 2020.

It was a turbulent day for stocks worldwide: European markets recorded their worst session since 2016, and major benchmarks in Asia also closed down.

"There was a cavalier attitude about the virus," said Bruce Bittles, chief investment strategist at Baird, an investment banking and money-management firm. With the threats appearing to increase, he added, "you have to think about the global economy slipping enough to cause a shortfall in earnings."

Italy reported it had 219 cases and locked down 11 towns, restricting the movements of 50,000 people. Police and military forces were deployed to ensure that only people with special permission left or entered towns covered by the order. Officials in Lyon, France, stopped a bus from Milan on Monday and confined the passengers inside over suspicions of a case onboard, the newspaper Le Parisien reported.

South Korea, a major industrial centre, reported 231 new cases a day after its government said it was prepared to use emergency powers if necessary. And state-owned media in Iran reported that the virus had killed 12 people there - the highest death toll outside China.

"We knew for a while that it would slow Chinese growth and that it would have a negative impact on the global supply chain for any company that sources a lot of their input products from China, said Lec Young, managing director of global markets research at FTSE Russell.

"What's new is that we're getting significant outbreaks in Italy, for example. It happens to be close to Milan, which obviously is the financial centre of Italy and it's also close to southern Germany and Switzerland, which together that region is really the manufacturing hub of Europe. That's new"

"The spread of the virus to Europe, the worsening situation in China but also now South Korea - which is also a major global export hub - it's ratcheting up the uncertainty. Unfortunately, this issue is very unusual in markets where information normally comes pretty quickly, it can be discounted. This issue by definition comes in dribs and drabs over a period of many weeks and months. It's very dangerous. A lot of people were too dismissive of this too early."

In the United States, the Centers for Disease Control and Prevention said there were 53 people infected with the virus, up from 34 on Friday. Nearly all the new infections involve former passengers on the Diamond Princess cruise ship docked in Japan, who have been quarantined on military bases in California and Texas. British officials announced that four passengers who had been in quarantine since returning to the country were infected, raising that country's number of cases to 13.

"It's that shift in the narrative that is forcing equity investors to have to wake up from the complacent stupor that they've been in," said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.

Not all the news was bad. China may be getting the outbreak under control, the World Health Organization said. Health officials said the daily tally of new infections had been declining since Feb 2 because of the lockdown around Wuhan, the city at the centre of the outbreak. The Chinese government and businesses have begun chartering trains, buses and airplanes to retrieve workers who were stranded by travel restrictions put in place during the Lunar New Year holiday.

"We're encouraged by the continued decline in cases in China," said Dr Tedros Adhanom Ghebreyesus, the organization's director general. Still, he cautioned that the outbreak could worsen.

"Does this virus have pandemic potential?" he said. "Absolutely it has."

Officials at the Federal Reserve and within the Trump administration are watching the situation closely, although the central bank's main tool for stoking growth - lowering interest rates - might not help much if factories are not producing goods and supply chains are disrupted by quarantines.

New pessimistic forecasts about the US economy began to emerge last week.

In a note published on Friday, economists at JPMorgan Chase wrote that they expected global growth to slow to a 1 per cent annual pace in the first quarter, which would be the weakest quarter of the economic expansion that began after the deep recession that started 12 years ago.

In the US, the consensus estimate for first-quarter domestic growth has slipped to 1.5 per cent, according to data from FactSet on Monday, from 1.7 per cent at the end of 2019. Economists at Goldman Sachs, who were expecting first-quarter domestic growth of 2 per cent as recently as late January, have been steadily lowering their estimate, which fell to 1.2 per cent on Sunday. "The risks are clearly skewed to the downside until the outbreak is contained," they wrote.

Airline and technology stocks were particularly hard hit on Monday. Delta Air Lines shares fell 6.3 per cent and American Airlines slid 8.5 per cent, while Apple stock fell 4.8 per cent. The tech-heavy Nasdaq composite index dropped 3.7 per cent.