Worried investors dumped stocks again Tuesday as American officials warned that it was only a matter of time before the coronavirus outbreak spreads to the United States.
A day after its worst one-day slide in two years, the S&P 500 closed down 3 percent on Tuesday, a decline that put the index deeper in the red for 2020.
“At this point the market is resigning itself to the fact that the impact of the coronavirus is going to be well beyond China and the first quarter of 2020,” said Yousef Abbasi, global market strategist at INTL FCStone, a financial services and brokerage firm.
Since the outbreak first emerged in January, the primary concern among economists and investors has been how a temporary paralysis of the Chinese economy — the world’s second largest — would affect global supply chains. For weeks, American investors paid little mind: As recently as last Wednesday, the S&P 500 was at a record high.
But since then, growing outbreaks in Europe and elsewhere in Asia — and a warning from health officials about the potential risks to the United States — have raised fears that the virus will threaten the nations that serve as key customers for almost everything the global economy produces.
“When you start to impact Western Europe and when you start to impact the United States, now you’re impacting the global economy way more significantly because you’re impacting these demand markets,” Mr. Abbasi said.
Monday was the worst day for American markets since February 2018, with the S&P 500 falling 3.4 percent after officials in Italy and South Korea reported new infections, and the tumble continued Tuesday. Declines in the S&P 500 were led by energy, industrial and materials shares, sectors of the market closely tied to Chinese demand for raw materials.
The sell-off accelerated after the Centers for Disease Control and Prevention warned Americans that they should brace for the likelihood that the coronavirus will spread to communities in the United States.
“It’s not so much of a question of if this will happen in this country anymore, but a question of when this will happen,” said Dr. Nancy Messonnier, director of the National Center for Immunization and Respiratory Diseases. “We are asking the American public to prepare for the expectation that this might be bad.”
Investors moved into the safety of government bonds, pushing their prices up and yields down. The yield on the 10-year Treasury note closed at a record low of 1.335 percent and the 30-year bond also dropped to a record of 1.81 percent — two signals that investors expect growth in the United States to slow.
“The rate at which people are buying, particularly long-end interest rate products, is extraordinary,” said Rick Rieder, chief investment officer of global fixed income at BlackRock.
The virus may merely be a catalyst for an overdue sell-off, some analysts said.
The S&P 500 rose 17 percent between early October, when the market first caught wind that the Trump administration was close to an interim trade deal with China, and last Wednesday, when it closed at a record high. At the same time, forecasts for this year’s corporate earnings — the lodestar for forward-looking stock market investors — have been falling.
The combination of higher stock prices and lower expected earnings made stocks look increasingly overpriced according to widely used metrics, such as price-to-earnings ratios. This month, the S&P 500 reached a price-to-earnings ratio of 19 times the next 12 months’ expected earnings, the highest level since May 2002.
A high ratio is precarious: Even slight changes in profit expectations can result in big price swings.
“It really requires everything to go well,” said Stephen Gallagher, chief U.S. economist for Société Générale. Now, he said, the market is “entering a period where we’re seeing valuations adjust very abruptly.”
While jarring, the jolt the market has suffered so far isn’t extreme. The S&P 500 was down about 7.6 percent from its recent record high at the end of Tuesday’s trading day.
Still, the slump is already raising expectations that the Federal Reserve could take action to lower interest rates if the sell-off deepens.
In comments on Tuesday, Vice Chairman Richard H. Clarida signaled that Fed was not yet ready to act, though it is monitoring economic developments related to the virus.
But in recent days, the market-based probability — derived from prices in the Fed funds futures market — of a rate cut at the Fed’s April meeting jumped to over 60 percent, according to data from CME. Last Wednesday, when markets were at record highs, the market was putting odds of a cut at the April meeting at less than 25 percent.
Markets have come to rely on the Fed to step in during periods of extreme stress. In late 2018, after a nearly 20 percent tumble in stocks, the Fed backed away from its plan to continue raising rates. Instead, it cut rates three times in 2019, which helped supercharge almost every form of financial asset and sent the S&P 500 up 28.9 percent for the year.
Growing expectations of rate cuts could help explain the sharp decline in bond yields in recent days, said Scott Mather, chief investment officer of U.S. Core Strategies at Pimco. Investors may be flocking to short-term government debt in the expectation that lower rates from the Fed will raise the value of their holdings.
“I think that you’ll hear more about that from the Fed in coming days, certainly if we have a couple more days like this,” Mr. Mather said.
Jeanna Smialek contributed reporting.