Stocks log worst week since 2008: March 20, 2020
US stocks ended Friday's session lower, although the losses were more contained than they have been in previous weeks.
Even so, it was the worst weekly performance for all three major stock indexes since October 2008.
The Dow closed 913 points, or 4.6% lower, dropping 17.3%this week. The index has now erased all of the gains accumulated during the Trump administration.
The S&P 500 finished down 4.3%. It fell 15% on the week.
The Nasdaq Composite slipped 3.8%, for a 12.6% loss this week.
Famed hedge fund Bridgewater predicts the coronavirus will lead to $4 trillion in lost corporate revenue for both public and private businesses in the U.S., according to a report the firm published Friday.
“That is a very dangerous decline, and if not mitigated, it will lead to a long-lasting ripple,” said the Bridgewater team who authored the research report.
In Bridgewater’s model, companies will have a shortfall of $2 trillion “concentrated in energy and travel and leisure, and about equally divided between large and small companies.”
The firm projects a 6% decline in US GDP for 2020, with the biggest hit during the second quarter.
The firm also estimates a decline of $12 trillion for global businesses in 2020.
“Since this hit to revenues is happening throughout the world, the total hole globally will be roughly three times that—about $12 trillion. Governments are responding, of course, but in most cases these responses will just mitigate some of the ripple. Governments’ capacities to deal with this hit vary greatly and will be a major driver of markets going forward.”
“Many companies will try to fill this gap by drawing credit lines, increasing their debt positions,” said the investors.
If government policies don’t help fill the gap, companies are likely to dramatically cut spending, which would result in meaningful cuts in employment.
Ray Dalio, who founded Bridgewater, is famous for predicting the 2008 financial crisis.
Less than two hours are left in the trading day and all three major US stock benchmarks are in the red.
The S&P was last down nearly 2.3%, while the Dow was down 2.3%, or 470 points. Still, today's drop is less severe than many over the past two weeks.
The Nasdaq Composite was last down 1.5%.
The first half of 2020 will be ugly. Economic forecasts for the first and second quarters are dire, but none have been quite as bad as one published by Goldman Sachs today.
Goldman is now forecasting a whopping 24% annualized contraction in second-quarter GDP, as well as a 6% drop in the first three months of the year.
Declines in consumer spending, manufacturing activity and building investment will weigh on the economy this spring, the bank said.
Even though the economy is expected to aggressively rebound in the second half of the year, the American economy will contract in 2020, shrinking by 3.8%, Goldman predicts.
This is the second dire economic forecast from Goldman this week. The bank also expects unemployment claims to jump to their highest level ever -- 2.25 million -- next week.
Existing home sales soared to their highest level since before the financial crisis and subsequent Great Recession on Friday.
Nearly 5.8 million home were sold last month, the most since February 2007 and a 6.5% jump.
But as great at that sounds, there are clouds on the horizon.
Today's results are all water under the bridge as far as the outlook ahead as the coronavirus is keeping millions in their homes and not out walking around kicking the tires on whether to purchase a new residence," said Chris Rupkey, chief financial economist at MUFG.
The US economy -- as well as the global economy -- is expected to plunge into a short but sharp recession due to the raging coronavirus outbreak. This new recession is starting now, Rupkey said, with the bright light of a strengthening housing sector going out for America.
The Federal Reserve announced another move to help keep the financial system function orderly throughout the coronavirus crisis.
The latest action expands the central bank's action in money markets, enhancing the liquidity through its Money Market Mutual Fund Liquidity Facility, or MMLF.
The Fed first announced the MMLF on Wednesday.
The facility allows the Boston Fed to make loans available to financial institutions to buy high-quality assets from municipal money market mutual funds. These loans will in turn be secured by the assets bought.
"I would anticipate similar responses in other markets, should additional stresses emerge," said Steven Friedman, senior macroeconomist at MacKay Shields, in emailed comments Friday.
US stocks were lower around midday, with the S&P 500 in modestly negative territory, and the Dow and Nasdaq Composite in the green. So far, nothing crazy.
The benchmarks are still on track for another ugly weekly performance. Stocks were down as New York Governor Andrew Cuomo and the White House coronavirus task force announced further measures to curtail the outbreak.
The rise of social distancing to prevent the spread of the coronavirus has forced Peloton (PTON) to suspend selling and delivering its treadmill.
The at-home fitness company explained in a post that the treadmill is too big to deliver while maintaining a safe distance from customers.
Peloton is still selling and delivering its more well-known bike, which is smaller, but the company will only deliver it to a customer's door.
The market meltdown of the past few weeks is hurting various corners of the financial system. One area in which things are expected to go from bad to worse? High yield bonds.
High yield -- or junk -- bonds carry lower quality labels from ratings agencies like Standard & Poor's and Moody's because the companies behind them are less credit worthy. Ordinarily, these bonds also yield more than safer options, giving investors more bang for their buck.
But that hasn't held true of late: "The high yield index has now erased all of its total returns going back to January 2017," said Oleg Melentyev and Eric Yu, credit strategists at Bank of America Merrill Lynch, in a note Friday.
The credit cycle has turned and the number of companies defaulting on their junk debt is about to jump, according to the analysts.
The defaults will be driven by companies in the energy industry, with the default rate across sectors at 9%. In normal credit cycles, default rates peak at 10% to 12%, the analysts said.
Energy and gaming have been the worst hit segments in high yield over the last week, month and year-to-date," the analysts said in a note Friday.
With tumbling oil prices, energy companies will struggle in the near term -- but lack of credit-worthiness will make things harder for them for a long time to come.