The bear market has arrived.
U.S. and Canadian stocks fell sharply on Wednesday, bringing total losses for key North American indexes over the past three weeks to more than 20 per cent and ending a remarkable 11-year bull market run for the Dow Jones Industrial Average, as global markets continue to weigh the economic damage caused by the global spread of the coronavirus.
The Dow fell 1,464.63 points or 5.9 per cent, erasing Tuesday’s promising rebound and leaving the blue-chip index down 20.3 per cent since from its high point on February 12 -- passing the 20 per cent threshold that typically defines a bear market.
Canada’s S&P/TSX Composite Index fell 4.6 per cent on Wednesday, and is also down 20.5 per cent from its highs.
The latest setback for stocks continues a remarkable bout of volatility over the past three weeks, challenging optimistic assumptions that damage to the global economy and corporate profits should be relatively mild and short-lived.
“Both the real economy and the financial economy are exhibiting acute signs of stress,” David Kostin, an influential strategist at Goldman Sachs, said in a report that greeted investors at the start of the day.
This marks the third bear market for the TSX over the past decade: The index fell 24.4 per cent between 2014 and 2016, and 22 per cent in 2011.
But for U.S. stocks, this is the first bear market since major indexes began to recover from the financial crisis in March 2009, exactly 11 years ago.
The S&P 500 fell 4.9 per cent, to 2741.42 on Wednesday, bringing the index’s decline since February 19 to 19 per cent, based on closing levels – and down 20.2 per cent, which is within bear market territory, based on intraday levels.
But what’s most notable about this downturn is its brutally quick pace. The selloff has unfolded in the space of just three weeks, punctuated on Monday by the worst one-day selloff for the TSX since 1987 and the worst day for the S&P 500 since 2008.
Wednesday’s declines follow a dizzying number of developments tied directly to the coronavirus.
The World Health Organization declared that the outbreak is a pandemic given its global spread to more than 100 countries.
“Pandemic is not a word to use lightly or carelessly,” Dr. Tedros Adhanom Ghebreyesus, W.H.O.s’s director general, said at a news conference.
The declaration, though hardly a surprise, hardly soothed rattled nerves. It arrived amid concerns that authorities are struggling to contain the coronavirus, possibly prolonging and deepening the impact on people, companies and the economy despite interest rate cuts by the Federal Reserve, the Bank of Canada and the Bank of England.
Italy, where the number of cases has topped 12,000, has locked down most of its population. In the United States, cases have surged above 1,000. And Germany’s leader warned that 60 to 70 per cent of the country could be infected.
Some strategists are turning gloomier, as the coronavirus weighs on everything from travel to conferences to consumer confidence.
Mr. Kostin said that falling corporate profits could drag down stock prices even more.
He now estimates that 2020 profits for companies in the S&P 500 will fall 5 per cent below 2019 levels, down from his recent estimate of zero per cent growth. The second quarter is looking particularly ugly: He sees profits declining 15 per cent, year-over-year, before recovering later this year.
As a result, Mr. Kostin expects the S&P 500 will fall to a low of 2450 midway through the year, implying additional losses of nearly 11 per cent. If he’s right, index will bottom out 28 per cent below its record high in February.
For Canada, the energy sector has been a notable drag on the stock market’s performance. Saudi Arabia announced on Sunday that it will increase crude oil production, starting a price war with Russia even as demand for energy is declining – a move that sent oil prices careening 25 per cent in a single day.
“While [the decline in oil prices] has not been all due to the coronavirus, the drop still implies that investment in the sector will fall sharply. We have already heard from several firms this week that they are cutting their capital spending plans for 2020 by between 20 per cent and 30 per cent,” Stephen Brown, an economist at Capital Economics, said in a note.
The Canadian energy sector fell 4.8 per cent on Wednesday, bringing the overall decline since February to more than 30 per cent. The sector is now lower than it was at the depths of the 2008 financial crisis.