It wasn’t the darkest day the US stock market has ever seen, but Monday’s meltdown was ugly, with the Dow Jones industrial average plunging 7.8 percent, its biggest one-day drop since the financial crisis in 2008.
Concern that the spread of coronavirus will be so disruptive that we will self-isolate ourselves into a recession has taken Wall Street from record-high stock prices to the brink of a bear market in less than a month.
But there was a new twist Monday: Oil prices, another barometer of economic vitality, crashed. The West Texas Intermediate benchmark collapsed by 25 percent, the steepest decline since the chaos of the Gulf War in 1991 and a lightning-fast move that unsettled Wall Street because it has enormous implications for the debt-burdened US energy industry.
Meanwhile, investors continued their flight to the safest haven they know: US government bonds. The yield on the 10-year Treasury, which moves in the opposite direction of prices, fell to a record low 0.501 percent. A year ago, the yield was 2.61 percent.
If you aren’t sure where this is all headed, neither are the pros. Here’s an attempt to answer some questions you may have.
1. How bad did it get for stocks on Monday?
At the opening, US stocks quickly fell by 7 percent, triggering a 15-minute “circuit-breaker” designed to give investors time to take a deep breath. Stocks recovered a bit before falling back and leveling off.
Measured by percentage, the Dow had its 11th-biggest decline on record. On its worst day during the 2008 financial crisis, the 30-stock index fell 7.9 percent, and it cratered 22.6 percent on Black Monday in October 1987.
The Standard & Poor’s 500, a broader gauge that lost 7.6 percent on Monday, posted its 17th-largest decline, also just behind its worst day in 2008.
On a point basis, which becomes less meaningful as stocks climb higher, it was the biggest loss, by far, for either index. The Dow dropped almost 2,014 points while the S&P 500 lost nearly 226 points.
2. Is the bull market over?
Technically, no, but by the end of Monday stocks were about 1 percentage point away from the 20 percent peak-to-trough decline that defines a bear market.
Stocks flirted with a bear market at the end of 2018 as the Federal Reserve raised interest rates, but they resumed their march higher after the Fed paused. This time around, few forecasters expect stocks to avoid a bear market, but it’s worth noting that the 20 percent mark is something of an arbitrary milestone.
There is no consensus among forecasters on how long stocks may fall. That’s because no one really knows how bad the coronavirus outbreak will get or just how much it will affect the economy.
3. What does the price of oil have to do with coronavirus?
A lot. The spread of Covid-19, the illness caused by the virus, has slowed economic activity in China, by far the largest importer of petroleum in the world, and has sharply reduced global travel. That has lowered demand, and when demand for oil falls, so does the price. Crude prices have tumbled by half this year, to about $31 a barrel in the United States.
Oil’s collapse on Monday followed the failure on Friday of OPEC and Russia to agree on production cuts aimed at offsetting waning demand. The Saudis and Russians seem intent on squeezing US shale producers, whose cost of production is higher than theirs, by waging a price war.
Lower oil prices are typically good news, but a drop this dramatic will hurt the economies of countries dependent on oil revenues if it persists, with ripple effects hitting this country. The United States has a much more diversified economy than, say, Russia, but we have become a net exporter of oil and a sustained slump could result in thousands of job losses.
The S&P 500 Energy Sector index fell 20 percent on Monday alone.
“In 1980, lower oil prices were good for the US,” said Jeffrey Pontiff, a professor of finance at Boston College’s Carroll School of Management. “Now, it’s hard to say with certainty.”
4. Will there be a recession?
The initial expectation of economists was that the coronavirus epidemic would slash growth in China as the government shut factories and quarantined millions of people. They believed the impact on the United States would be modest, with companies straining to get parts and products from Chinese suppliers but the economy continuing to expand.
“Initially, the supply disruption seemed temporary . . . and you’d expect a pretty quick recovery," said William English, a finance professor at the Yale School of Management.
Now, English and others aren’t sure whether the US economy can avoid a recession because the initial “supply shock” has become a “demand shock” as “business and consumers hunker down and see what’s going to happen.” (A recession is defined as two consecutive quarters of economic decline, as measured by GDP.)
5. What can the government do?
The Federal Reserve last week took the unusual step of cutting rates by half a percentage point to help buffer the economy from the demand shock. But there is only so much the Fed can do, because access to credit wasn’t a problem before the crisis emerged. Instead the rate cut, which will take months to work its way through the economy, may help bolster consumer and business confidence, while the Fed’s decision to pump more cash into the money markets should keep the financial system on a sound footing.
On Friday, Eric Rosengren, president of the Federal Reserve Bank of Boston, suggested that the central bank could consider extending its purchase of government bonds to other assets to ease the strain on financial markets. However, that would require approval by Congress.
Congress and the White House would also have to agree on any spending measures aimed at stimulating the economy. On Monday evening, President Trump said he would meet with leaders of the Senate and House Republicans on Tuesday to discuss a “very substantial” payroll tax cut and relief for hourly employees who miss work because of the virus outbreak.
6. Is it too late to start buying bonds?
As stocks have tanked, investors have sought the safety of government bonds, pushing prices higher and yields lower. “That’s made for an expensive bond,” said Sonal Desai, chief investment officer of fixed income at Franklin Templeton in San Mateo, Calif.
Desai cautioned against fleeing into bonds now, because that would entail taking losses on stocks and buying bonds at high prices that could retreat when the coronavirus crisis eases.
“I would hesitate to make any dramatic moves in the current market environment,” she said.