Stocks fell sharply in volatile trading on Tuesday as an emergency rate cut by the Federal Reserve failed to assuage concerns of slower economic growth due to the coronavirus outbreak.
The decision to cut rates by half a percentage point came two weeks before the Fed's scheduled meeting as the central bank felt it was necessary to act quickly to combat the effect of the virus spreading worldwide. It's the first such emergency action coming in between scheduled meetings since the financial crisis.
The Dow Jones Industrial Average closed 785.91 points lower, or nearly 3%, to 25,917.41; it rose more than 300 points earlier in the day. The 30-stock average gyrated between sharp gains and solid losses after the decision was announced. The S&P 500 fell 2.8% to 3,003.37 while the Nasdaq Composite pulled back 3% to 8,684.09.
Investors, in turn, loaded up on U.S. Treasurys, pushing the benchmark 10-year yield below 1% for the first time ever. Gold, meanwhile, jumped 2.9% to settle at $1,644.40 per ounce.
"It's great that the Federal Reserve recognizes that there's going to be weakness, but it makes me feel, wow, the weakness must be much more than I thought," CNBC's Jim Cramer said on "Squawk on the Street" right after the sudden cut. "I'm now nervous. I'm more nervous than I was before."
Traders had already priced in a rate cut of 50 basis points by this month's policy meeting. Fed Chairman Jerome Powell noted the central bank was not prepared to use any additional tools to stimulate the economy aside from rate cuts. This may have disappointed some on Wall Street who were expecting something more from the central bank.
Bank shares fell broadly as the benchmark 10-year Treasury yield hit a record low. Bank of America dropped more than 5.5% while JPMorgan Chase and Citigroup slid 3.8% each. The 10-year rate hit a low of 0.906%.
"The market is still trying to find its footing," said Adam Crisafulli, founder of Vital Knowledge, in a note. "The panicked collapse of the last week isn't something that will be quickly forgotten, and it will take a couple of weeks (at least) before stocks are on firmer ground."
President Donald Trump has pressured Powell and the Fed to cut rates. After the Fed's announcement, the president tweeted that the central bank "must further ease and, most importantly, come into line with other countries/competitors."
Tuesday's announcement comes after the G-7 said in a statement earlier on Tuesday they will use policy tools to curb an economic slowdown. However, the statement contained no specific actions.
Investors have been fretting over a potential economic slowdown as the coronavirus spreads around the world. More than 89,000 coronavirus cases have been confirmed globally along with more than 3,000 deaths related to the virus.
"The worse the economic situation gets, the more likely there will be massive coordinated monetary and fiscal stimulus to offset the weakness," Tony Dwyer, chief U.S. equity strategist at Canaccord Genuity, said in a note. "There is no way to judge the global economic and EPS impact of the COVID-19 virus as cases globally are still ramping."
Tuesday's moves follow a roaring comeback rally in the previous session that saw the Dow post its biggest percentage gain since March 2009. The index also recorded its largest-ever point surge on Monday, gaining 1,294 points..
Monday saw U.S. stocks snap a losing streak that had gone on for over a week. Some investors were skeptical that the rally has legs without a significant central bank response. Even if that comes to fruition, investors have their doubts the market has seen the end of its tumultuous trading of the last six days.
—CNBC's Michael Bloom contributed to this report.
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