Wall Street shook off growing fears that a mysterious and fast-moving virus in China could hurt the global economy, even as international markets were hit by those concerns on Thursday.
After an early decline, the S&P 500 staged an afternoon rally to close 0.3 percent higher. The market was buttressed by strong earnings from blue-chip companies including Microsoft, Coca-Cola and Hershey as well as a rally in financial shares.
In recent days, the global economic outlook has darkened in the face of the expanding outbreak.
The vast majority of people infected by coronavirus are in China, but governments around the world are taking steps to contain the disease, and the risk to investors is that those efforts dampen economic activity. Russia closed part of its 2,600-mile border with China on Thursday, and a number of countries have discouraged their citizens from traveling there.
A growing number of companies have warned that they will have to close or shift operations and could take a financial hit from widespread business disruptions in China. Several others say it is too early to tell what the impact will be.
Overnight, investors fled riskier assets like stocks and oil and turned instead to investments that are considered safe havens like gold and Treasury bonds. Major benchmarks in Europe and Asia were down more than 1 percent. Prices for key industrial raw materials such as crude oil, copper and iron ore all fell.
“What you’ll see take place is a significant further slowdown in Chinese economic growth, and Chinese growth has been so important,” said Edward Alden, a senior fellow at the Council on Foreign Relations. “You’re already seeing this in commodities prices.”
In the bond markets, yields on longer-term United States government securities fell below those on shorter-term Treasury bills, an unusual situation known as an inversion that is considered one of the more reliable indicators of economic recession.
“An inversion suggests the market is sniffing out some future trouble, and is a well-known signal in financial circles (and so gets a lot of attention, which can affect confidence),” Don Rissmiller, chief economist at Strategas Research, wrote in a research note spotlighting the phenomenon.
But Wall Street’s recovery suggests that investors still doubt global woes will wash up on American shores. And they seem to have little reason to worry. The American labor market remains strong, and growth, while unspectacular, has been steady.
On Thursday, the Commerce Department reported that the American economy grew at a 2.1 percent annual rate from October to December, the same as the previous three months.
Even if a virus-related slump did hit, the stock market in the United States has shown a knack for shrugging off inconvenient issues in recent years.
Stocks rose 28.9 percent in 2019 despite a sharp slowdown in profit growth, a wobbly global economy, and the noisy trade war between the United States and China, the world’s two largest economies.
Much of those gains were driven by actions taken by the Federal Reserve, which in January last year swiveled away from plans to lift rates and later cut rates three times.
There are some indications that markets are beginning to price in the growing odds of Fed rate cuts this year. In recent weeks, the market-based probability — derived from prices in the Fed funds futures market — of a rate cut at the Fed’s June meeting jumped to roughly 40 percent from 15 percent, according to data from CME.
In part, that could reflect investor confidence that the Fed would respond if the growing outbreak in China truly did threaten the outlook for economic growth.