U.S. Stock Market
Stocks fell sharply as fears over the COVID‑19 coronavirus outbreak caused steep declines over the last six trading days of the month. All the major indexes slipped into correction territory, or down over 10% from the highs they established as late as February 20. As was widely reported, the S&P 500 Index suffered its fastest correction on record. The technology‑heavy Nasdaq Composite Index held up best, while the narrowly focused Dow Jones Industrial Average fared worst. Within the S&P 500, communication services and real estate shares proved the most resilient, while plunging oil prices drove energy stocks to nearly a 15% decline in total return terms, which includes dividends. Trading volumes and volatility surged in the sell‑off late in the month, with the Cboe Volatility Index (VIX) hitting levels not seen since the financial crisis in 2008–2009.
Virus Spreading Beyond China Marks Watershed for Markets
The COVID‑19 outbreak loomed large over Wall Street throughout February, but investors began the month seemingly convinced that it would remain largely confined within China. Reports that the rate of increase in new cases in China appeared to be moderating seemed to support sentiment, as did news of mass quarantines and other aggressive containment actions by Chinese officials. Investors also seemed encouraged by news of stimulus measures from the Chinese central bank, including cutting interest rates and injecting liquidity into the financial system.
Evidence that the virus might be transitioning into a global pandemic proved a watershed for the markets, however. Stocks began falling sharply on February 21, following reports of a widespread outbreak in South Korea. Selling accelerated the following week on news of large outbreaks in Iran and Italy, along with reports of scattered infections in dozens of countries. News of the first infections in the U.S. without any apparent direct connection to China seemed to weigh particularly heavy on sentiment, as did reports of Apple and other large companies reducing guidance as a result of the outbreak. As the declines continued, T. Rowe Price traders also observed the impact of systematic selling by algorithm‑driven strategies.
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|S&P 500 Index||
|Nasdaq Composite Index||
|S&P MidCap 400 Index||
|Russell 2000 Index||
Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended February 29, 2020. The returns include dividends based on data supplied by third‑party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only.
Sources: Standard & Poor’s, LSE Group. See Additional Disclosures.
Investors Await Clarity on Policy Response
Investors may have also been disappointed over the lack of clarity regarding a policy response from either the White House or the Federal Reserve. Stock prices reached their nadir on Friday morning, February 28, after acting White House chief of staff Mick Mulvaney acknowledged that schools might have to be closed, contradicting assertions from President Donald Trump, Director of the National Economic Council Larry Kudlow, and other officials that the virus was largely contained. St. Louis Federal Reserve President James Bullard seemed to contribute to a sell‑off in the futures market when he said in a statement that the Fed’s current stance was “in a good position” and that the “baseline case” was for no change in rates.
Markets recovered somewhat in the final trading hours of the month, after reports emerged that the White House was considering another tax cut to spur growth. Fed Chair Jerome Powell also issued a statement acknowledging that the outbreak was “posing evolving risks” while promising that the Fed would “use our tools and act as appropriate to support the economy.” Federal funds futures as tracked by CME Group ended the month pricing in a 100% chance of a cut in the federal funds rate by the Fed’s next meeting in March, with the likelihood of at least a full percentage point of cuts by the end of the year. (The Fed announced a half‑point rate cut on the morning of March 3.)
Current Economic Signals Remain Generally Positive
Even as investors braced for a slowdown, many recent economic signals remained positive. Nonfarm payrolls jumped by 225,000 in January, well above estimates. Average hourly earnings also increased at a healthy pace, and the labor participation rate picked up as the tight job market encouraged more Americans to reenter the workforce. Personal incomes rose the most in nearly a year in January while retail sales increased at a solid pace. Even the beleaguered manufacturing sector appeared to be picking up steam, with factory activity in January expanding for the first time since July, while business spending on non‑defense goods rose sharply. Housing signals were also positive, with building permits reaching a 13‑year high.
The corporate earnings season also rounded out on a somewhat better note than anticipated, which seemed to help fuel the market’s rally before it was undone by virus fears. According to FactSet, overall earnings for the S&P 500 rose by 0.9% on a year‑over‑year basis in the fourth quarter of 2019, marking the first rise since late 2018. Results would have been stronger if not for a 44% (year‑over‑year) plunge in energy sector profits.
Economic Acceleration May Be Delayed Rather Than Canceled
The eventual course of the COVID‑19 outbreak and its impact on the global economy remain highly uncertain, and the serious challenge it poses to some companies and sectors should not be discounted. T. Rowe Price’s economists, investment managers, and industry analysts—some of whom have medical or scientific backgrounds—are carefully monitoring developments from our global offices. While the virus is likely to take a toll on economic activity in the first half of the year, abundant global liquidity and the strong likelihood of a forceful global policy response mean that there is a good chance economic acceleration is only delayed rather than canceled. We are also mindful that past periods of market upheaval have presented opportunities for those willing to remain patient and focus on the long‑term potential of well‑positioned companies.
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