Dow Drops More Than 1,000 as COVID-19 Outbreak Threatens Economy

Specialist Erica Fredrickson works with a colleague on the floor of the New York Stock Exchange, Monday, Feb. 24, 2020. Stocks are opening sharply lower on Wall Street, pushing the Dow Jones Industrial Average down more than 700 points, as virus cases spread beyond China, threatening to disrupt the global economy. (AP Photo/Richard Drew)

The Dow Jones Industrial Average slumped more than 1,000 points Monday in the worst day for the stock market in two years as investors worry that the spread of a viral outbreak that began in China will weaken global economic growth.

Traders sought safety in U.S. government bonds, gold and high-dividend stocks like utilities and real estate. The yield on the 10-year Treasury fell to the lowest level in more than three years.

Technology stocks accounted for much of the broad market slide, which wiped out all of the Dow’s and S&P 500’s gains for the year.

More than 79,000 people worldwide have been infected by the new coronavirus. China, where the virus originated, still has the majority of cases and deaths. The rapid spread to other countries is raising anxiety about the threat the outbreak poses to the global economy.

“Stock markets around the world are beginning to price in what bond markets have been telling us for weeks – that global growth is likely to be impacted in a meaningful way due to fears of the coronavirus,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

The Dow lost 1,031.61 points, or 3.6%, to 27,960.80. At its low point, it was down 1,079 points.

The S&P 500 index skidded 111.86 points, or 3.4%, to 3,225.89. The Nasdaq dropped 355.31 points, or 3.7%, to 9,221.28 – it’s biggest loss since December 2018.

The Russell 2000 index of smaller company stocks gave up 50.50 points, or 3%, to 1,628.10.

Investors looking for safe harbors bid up prices for U.S. government bonds and gold. The yield on the 10-year Treasury note fell sharply, to 1.37% from 1.47% late Friday. It was at 1.90% at the start of the year. Gold prices jumped 1.7%.

Crude oil prices slid 3.7%. Aside from air travel, the virus poses an economic threat to global shipping.

Benchmark crude oil fell $1.95 to settle at $51.43 a barrel. Brent crude oil, the international standard, dropped $2.20 to close at $56.30 a barrel.

The slump in U.S. indexes followed a sell-off in markets overseas as a surge in cases of the disease in South Korea and Europe rattled investors.

Germany’s DAX slid 4% and Italy’s benchmark index dropped 5.4%. South Korea’s Kospi shed 3.9% and markets in Asia fell broadly.

South Korea is now on its highest alert for infectious diseases after cases there spiked. Italy reported a sharp rise in cases and a dozen towns in the northern, more industrial part of that country are under quarantine. The nation now has the biggest outbreak in Europe, prompting officials to cancel Venice’s famed Carnival, along with soccer matches and other public gatherings.

There are also more cases of the virus being reported in the Middle East as it spreads to Iran, Iraq, and Kuwait, among others.

The viral outbreak threatens to crimp global economic growth and hurt profits and revenue for a wide range of businesses. Companies from technology giant Apple to athletic gear maker Nike have already warned about a hit to their bottom lines. Airlines and other companies that depend on travelers are facing pain from cancelled plans and shuttered locations.

Technology companies were among the worst hit by the sell-off. Apple, which depends on China for a lot of business, slid 4.8%. Microsoft dropped 4.3%. Banks were also big losers. JPMorgan Chase fell 2.7% and Bank of America slid 4.7%.

Airlines and cruise ship operators also slumped. American Airlines lost 8.5%, Delta Air Lines dropped 6.3%, Carnival skidded 9.4% and Royal Caribbean Cruises tumbled 9%.

Gilead Sciences climbed 4.6% and was among the few bright spots. The biotechnology company is testing a potential drug to treat the new coronavirus. Bleach-maker Clorox was also a standout, rising 1.5%.

Utilities and real estate companies held up better than most sectors. Investors tend to favor those industries, which carry high dividends and hold up relatively well during periods of turmoil, when they’re feeling fearful.

The rotation into defensive sectors has made utilities and real estate the biggest gainers this year, while technology stocks have lost ground.

“The yields have been moving lower all year, so that’s providing a tail wind for utilities, for real estate,” said Willie Delwiche, investment strategist at Baird. “In the face of this heightened uncertainty, especially if it’s centered overseas, tech is going to bear some of the brunt of that because it’s been so popular, because it’s done so well, and because it has so much exposure to Asia.”

In the eyes of some analysts, Monday’s tank job for stocks means they’re just catching up to the bond market, where fear has been dominant for months.

U.S. government bonds are seen as some of the safest possible investments, and investors have been piling into them throughout 2020, even as stocks overcame stumbles to set more record highs. The 10-year yield on Monday was near its intraday record low of 1.325% set in July 2016, according to Tradeweb. The 30-year Treasury yield fell further after setting its own record low, down to 1.83% from 1.92% late Friday.

Traders are increasingly certain that the Federal Reserve will cut interest rates at least once in 2020 to help prop up the economy. They’re pricing in a nearly 95% probability of a cut this year, according to CME Group. A month ago, they saw only a 68% probability.

Of course, some analysts say stocks have been rising in recent weeks precisely because of the drop in yields. Bonds are offering less in interest after the Federal Reserve lowered rates three times last year — the first such cuts in more than a decade — and amid low inflation. When bonds are paying such meager amounts, many investors say there’s little real competition other than stocks for their money.

The view has become so hardened that “There Is No Alternative,” or TINA, has become a popular acronym on Wall Street. Even with Monday’s sharp drops, the S&P 500 is still within 4.2% of its record set earlier this month.

In other commodities trading Monday, wholesale gasoline fell 4 cents to $1.61 per gallon, heating oil declined 8 cents to $1.61 per gallon and natural gas fell 8 cents to $1.83 per 1,000 cubic feet.

Gold rose $27.80 to $1,672.40 per ounce, silver rose 35 cents to $18.87 per ounce and copper fell 3 cents to $2.59 per pound. The dollar fell to 110.74 Japanese yen from 111.62 yen on Friday. The euro weakened to $1.0842 from $1.0858.

AP Business Writer Stan Choe contributed.

By Elaine Kurtenbach / AP February 24, 2020

Source: Dow Drops More Than 1,000 as COVID-19 Outbreak Threatens Economy

All three major stock market indexes plummeted Monday amid fears of rising inflation and increased interest rates. At its lowest point, the Dow fell 1,600 points and closed down 1,100 points. It was the largest one-day point loss in the market’s history. CBS News business analyst Jill Schlesinger joins CBSN to explain what is affecting the markets.

Robinhood Glitch Lets Traders Borrow Unlimited Funds To Buy Stocks

Robinhood, the mobile trading app that has more than 6 million users, is contending with a glitch in its platform that enables some traders to use unlimited borrowed money to purchase stocks.

Known as “infinite leverage,” traders took to Reddit forums like WallStreetBets earlier this week to brag about the funds they were able to borrow despite the low amounts of cash in their accounts.

One trader boasted being able to get $1 million in borrowed funds with just $4,000. Another trader claimed to be able to borrow $50,000, purchase shares of Apple and subsequently lose the money. Robinhood traders also posted videos and screenshots showing how they were able to manipulate the platform including providing directions.

First spotted by Bloomberg, the glitch enables traders to inflate their account balances when borrowing money on margin. A common practice among traders, traders borrow money from the brokerage to purchase stocks. The firm, in this case Robinhood and its banking partner, acts as the lender issuing the money based on account balances, creditworthiness, and other criteria. By artificially increasing the account balance the traders were able to get their hands on more money to purchase stocks. In media reports Robinhood said it’s aware of what it called “isolated situations,” saying it’s communicating directly with the customers.

Today In: Money

This isn’t the first time Robinhood has had to contend with missteps since launching in 2013. Last year it made a PR blunder when it was forced to pull its new checking and savings account off the market. It boasted an interest rate of 3% but the product ran afoul of regulators. It held off until October in finally rolling out a cash management account, which now has a 1.8% APY. Despite that misstep and the glitch its dealing with now, Robinhood should continue on its meteoric rise. Since launching in 2013, it has amassed more customers than E*Trade and has a valuation of $7.6 billion.

Venture capitalists can’t get enough of the startup, throwing hundreds of millions of dollars it’s way. In July it raised $323 million giving it the hefty valuation it now commands. It also has aspirations beyond trading. It recently applied for a national bank charter with the Office of the Comptroller of the Currency. Its not clear how far those efforts will go given the OCC is losing its power to grant nonbank entities bank charters.

Robinhood isn’t the only high profile fintech to suffer from technical issues in recent weeks. In mid-October Chime, a popular challenger bank, experienced an outage that lasted more than 24 hours, preventing many of its more than 5 million customers from making payments and accessing their cash. Chime blamed its payment processor, saying it was experiencing problems that brought down Chime’s website and mobile app. In September Chime suffered a similar, albeit briefer, outage.

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A journalist for more than fifteen years, I am a freelance writer reporting on personal finance, entrepreneurship, investments, fintech and technology for a variety of media outlets. What sets me apart from my peers is my ability to take complex topics and explain it to the masses. After years of covering the equities markets as a technology reporter and special contributor to the Wall Street Journal, I embarked on a freelance career providing my readers with invaluable advice on everything from investing to landing a job. With the intersection between personal finance and technology getting blurred, cutting through the fintech noise and getting to the bottom of the story is becoming increasingly important to readers around the globe.

Source: Robinhood Glitch Lets Traders Borrow Unlimited Funds To Buy Stocks

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The Yield Curve Just Inverted, Putting The Chance Of A Recession At 30%

The interest rate on the U.S. Treasury 10-year bond just fell below the rate on the 3-month bill in response to the Fed’s March announcement. This is called yield curve inversion as defined by Arturo Estrella and Frederic Mishkin. It implies a 25%-30% probability of a recession on a 12-month view. Their research can be found here.

As economic relationships go, the yield curve has a good track record. You can see the data below going back to 1982. Per the chart, using this series over recent history, the yield curve inverts before a recession reliably with no false positives. An impressive record. The blue line shows the spread between 10-year and 3-month interest rates. The black line is the zero bound. The shaded grey periods are historical recessions. Note that there is a lagged relationship here, recession historically occurs 6-18 months after inversion. So today’s yield curve suggests a fair chance of a 2019-2020 recession.

uncaptioned image

Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity

Federal Reserve Bank of St. Louis

Risks Of Interpretation

Nonetheless, there are some risks with this approach. The first is we’re looking at a limited run of data. There are only a few decades in the sample and a handful of recessions. We’re making a forecast here based on less than ten recessionary events, per the initial research and subsequent out-of-sample data. Plus there are countless pieces of economic data out there. Combining two of them and creating a good recession forecast is possibly due to data mining. For example Tyler Vigen’s site illustrates the problem, showing how correlations can be found between many things that have little basis in reality, such as an apparently strong relationship between mozzarella cheese consumption and sociology degrees. So even though the yield curve relationship looks robust, it has been plucked from hundreds of other relationships that could exist, but don’t look as meaningful. The human brain is adept at creating patterns where none exist.

Also, a 25-30% chance of recession is not that high. Going back from 1960 to 2018 we have 59 years of data. We’ve had U.S. recessions during 16 of those years. So even before any more sophisticated forecasting methods, your chance of being in a recession in any given year are 27%. There’s some auto-correlation there too, as recession years come in clusters, but still, saying the chance of recession coming within a year or so is around one in four isn’t that different from what history tells us regardless of what the economy is doing. Of course, even at a 30% probability the chances are roughly twice as high that a recession does not occur.

Also, the Federal Reserve (Fed) has a key target of avoiding a recession in order to maintain full employment. This one of their key policy targets. The Fed are quite capable of learning. The increasing emphasis on the yield curve has not gone unnoticed by the Fed. In fact, the initial research here was published by the New York Fed itself. So unlike in the past, the Fed may be able to take corrective action, which was exactly what Chairman Powell was looking to stress in the Fed’s March meeting release. The Fed’s challenge is obvious but not simple, a few quarters ago the markets were spooked by a potential stack of rate hikes in 2019 that could risk recession, so the Fed changed course. Yet, in doing so they have helped create an inverted yield curve, introducing another set of recessionary fears.

However, the risk here is the markets are capable of learning too, and there is some evidence that recessions are self-fulfilling, meaning that if enough decision makers expect a recession they may then take the very actions actions, such as temporarily cutting back on spending, that cause a recession to happen. In that light, yield curve inversion gaining more attention is bad news if it causes people to anticipate a recession, which then makes one more likely.

So yield curve inversion is not a positive sign for markets, but we may be overstating its importance. Also if the indicator is to be believed, we should watch out not just for inversion, but when the 3-month yield falls 1% or more below then 10-year yield, then our confidence in a recession around the corner should be quite a bit higher.

Articles educational only, not intended as investment advice.

Follow @simonwmoore on Twitter. Simon is Chief Investment Officer at Moola, and author of Digital Wealth (2015) and Strategic Project Portfolio Management (2009).

Source: The Yield Curve Just Inverted, Putting The Chance Of A Recession At 30%

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