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Wall Street Awaits Fed Rescue as Markets Swing Wildly on Pandemic Fears

Stocks, Oil, Bond Yields Plummet

(Associated Press) Stocks took an early nosedive on Wall Street Thursday before recovering much of the ground they lost as investors struggle to anticipate how wide the economic damage from the coronavirus outbreak will be.

The losses extended a weeklong rout that has brought the S&P 500 8.8% below the record high it set just a week ago. The Dow Jones Industrial Average cut its loss to 300 points by the early afternoon after being down as many as 960 earlier as investors saw some buying opportunities.

More companies including Microsoft and Budweiser maker InBev are warning their results will be hurt.

Bond yields edged higher, reversing a sharp drop in the early going, as demand for ultra-safe assets waned somewhat. The yield on the 10-year Treasury edged up to 1.32%. Gold prices also fell after rising earlier.

The S&P 500 was down 0.9% as of 1:05 p.m. Eastern time. after being down as much as 3.5% earlier. The Dow Jones Industrial Average lost 309 points, or 1.1%, to 26,650. The Nasdaq fell 1.2%.

The virus has now infected more than 82,000 people globally and is worrying governments with its rapid spread beyond the epicenter of China.

In California, health officials say a new coronavirus case could be the first in the U.S. that has no known connection to travel abroad or another known case, a possible sign the virus is spreading in a community.

Japan will close schools nationwide to help control the spread of the new virus. Saudi Arabia banned foreign pilgrims from entering the kingdom to visit Islam’s holiest sites.

Italy has become the center of the outbreak in Europe, with the spread threatening the financial and industrial centers of that nation.

The price of crude oil fell 3.2%. The price has been falling sharply as investors anticipate that demand for energy will wane as the economy slows.

At their heart, stock prices rise and fall with the profits that companies make. And Wall Street’s expectations for profit growth are sliding away. Apple and Microsoft, two of the world’s biggest companies, have already said their sales this quarter will feel the economic effects of the virus.

Goldman Sachs on Thursday said earnings for companies in the S&P 500 index might not grow at all this year, after predicting earlier that they would grow 5.5%. Strategist David Kostin also cut his growth forecast for earnings next year.

Besides a sharply weaker Chinese economy in the first quarter of this year, he sees lower demand for U.S. exporters, disruptions to supply chains and general uncertainty eating away at earnings growth.

Such cuts are even more impactful now because stocks are already trading at high levels relative to their earnings, raising the risk. Before the virus worries exploded, investors had been pushing stocks higher on expectations that strong profit growth was set to resume for companies.

The S&P 500 was recently trading at its most expensive level, relative to its expected earnings per share, since the dot-com bubble was deflating in 2002, according to FactSet. If profit growth doesn’t ramp up this year, that makes a highly priced stock market even more vulnerable.

Goldman Sach’s Kostin said the S&P 500 could fall to 2,900 in the near term, which would be a nearly 7% drop from Wednesday’s close, before rebounding to 3,400 by the end of the year.

Traders are growing increasingly certain that the Federal Reserve will be forced to cut interest rates to protect the economy, and soon. They’re pricing in a better than two-in-three probability of a cut at the Fed’s next meeting in March. Just a day before, they were calling for only a one-in-three chance.

Mortgage Rates Also Plummet

U.S. long-term mortgage rates declined this week as growing concern over the economic impact of China’s viral outbreak spurred a steep downturn in global stock markets.

Mortgage buyer Freddie Mac said Thursday the average rate for a 30-year fixed-rate mortgage fell to 3.45% from 3.49% last week. Rates are far below year-ago levels: the benchmark 30-year loan averaged 4.35% a year ago.

The average rate on a 15-year fixed mortgage slipped to 2.95% from 2.99% last week. The slide in stock prices pushed investors to buy up U.S. Treasury securities, viewed as a safe haven in the event of an economic downturn.

The rush of investors toward U.S. government securities pushed the yield on the 10-year Treasury note sharply lower. It marked a record low of 1.28% Thursday morning. Long-term mortgage rates usually follow the yield on the 10-year note.

The decline in mortgage rates in recent months and the solid economy have pushed up demand for housing. Americans signing contracts to buy homes jumped 5.2% in January from the previous month, the National Association of Realtors reported Thursday.

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