Sellers Tighten Grip on S&P 500, Nasdaq as Virus Spread Quickens

(Bloomberg) — American stocks are at risk of the first three-day decline since early December as anxiety about the spread of coronavirus continued to upend bullish sentiment that had sent indexes to records as recently as last week.

Investors 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 3% 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 after a raft of new coronavirus cases in numerous countries outside China redoubled concern about the ability of the illness to spread. The S&P 500 Index futures contracts expiring in March fell 1.4% as of 10:37 a.m. in Singapore while contracts on the Dow Jones Industrial Average were 1.4% lower and those of the Nasdaq 100 dropped 1.9%.

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.

(Adds U.S. stock index futures’ performance in fifth paragraph)

–With assistance from Abhishek Vishnoi.

To contact the reporters on this story: Jackie Edwards in Sydney at jedwards160@bloomberg.net;Vildana Hajric in New York at vhajric1@bloomberg.net

To contact the editor responsible for this story: Lianting Tu at ltu4@bloomberg.net

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