The Dow Jones Industrial Average dropped 785 points and bond prices surged after an emergency interest-rate cut by the Federal Reserve failed to reassure markets racked by worries that a fast-spreading virus outbreak could lead to a recession.
The Dow industrials lost 2.9 percent to 25,914. The Dow had surged 5 percent a day earlier on hopes for a broader set of stimulus measures. The S&P 500 index fell 2.8 percent and is now 11 percent below the record high it set two weeks ago. The Nasdaq fell 3 percent. The yield on the 10-year Treasury note briefly dropped below 1 percent for the first time.
The Fed's rate cut was the first outside of a regularly scheduled meeting since the 2008 financial crisis. The central bank cut the target of its key fed funds rate by a half of a percent, to between 1 percent and 1.5 percent, the largest cut since December 2008.
Stocks had rallied briefly in the morning following the Fed's surprise move, but it took just 15 minutes for the gains to evaporate. While the cut helped raise confidence for some investors — and gave exactly what some had been calling for — Federal Reserve Chairman Jerome Powell acknowledged that the ultimate solution to the health crisis will come from health experts and others, not central banks.
The Fed has a long history of coming to the market's rescue with lower rates and other stimulus measures, which has helped this bull market in U.S. stocks become the longest in history. Some analysts said the Fed's latest cut should provide some more confidence. “Confidence in markets is crucial,” said Quincy Krosby, chief market strategist at Prudential Financial. “Without confidence, you don't have a market."
For others, however, the Fed's move suggested that the economic repercussions of the coronavirus outbreak could be worse than investors thought. “I don't believe that market participants woke up this morning thinking we were facing a crisis similar to the global financial crisis,” said Kristina Hooper, chief global market strategist at Invesco. “But that's what the Fed's actions suggested to some."
The bellwether 10-year Treasury note's yield fell to 1.01 percent, a record low. Unlike short-term interest rates, which the Fed controls, bond traders control long-term bond yields. Falling bond yields are typically a harbinger of slowing economic activity.
Despite falling interest rates, markets are still faced with the same quandary that has sent stock prices tumbling 11 percent since they set a record just two weeks ago: No one knows how far the virus will ultimately spread before authorities can get it under control, and by how much companies’ profits will be shorn because of it.
"Lower interest rates do little to make consumers and businesses feel substantially more confident about the future when a health crisis is spreading around the world,” said Mark Hamrick, senior economic analyst for Bankrate.com. “It also cannot address the hobbled supply chains, including manufacturing capability in China and South Korea. Still, the Fed is doing what it can to try to keep the economy out of recession."
The record-setting point gain Monday and the steep tumble a day later show how difficult it can be to time your moves in and out of the stock market. They also illustrate how important it is to diversify your investments: While most stock mutual funds fell in price Tuesday, most bond funds rose in price.