Investors are looking to the White House and Congress for signs of leadership that are so far falling short of expectations.
Amid the novel coronavirus pandemic, the S&P 500 has fallen into bear market territory in the fastest-ever 20% decline, measured by data going back to World War II, according to CFRA.
The Federal Reserve has addressed the crisis with an interest rate cut and more liquidity. On Thursday it made a surprise announcement of a $1 trillion intervention that included bond purchases and expanded operations in the repurchase market, which banks use for short-term loans.
Still, economists say it isn't enough to help the economy, which is expected to abruptly stall as companies and individuals take extreme measures to stop the spread of the virus.
The Fed is expected to cut interest rates again next week, and very quickly take its target rate range back to zero, where it was for years after the financial crisis. But the economic turmoil is expected to get worse. Airlines and cruise lines are bleeding cash from lost business. Companies are telling workers to work from home, universities have instructed students to leave campuses and big sporting events and other gatherings are being canceled.
President Donald Trump addressed the nation Wednesday evening, but instead of soothing investors' frayed nerves, he did not have details on a fiscal plan that was accepted by Democrats. He also restricted travel from Europe, a move to stop the cross-border flow of the virus but another signal that the economic impact from the virus could be deeper than expected.
CNBC's Jim Cramer reported that he believes the White House is currently debating some big plans to boost the economy, including a trust fund to backstop credit lines to companies in need.
"It's obvious that the market was very disappointed by the president's speech last night," said Julian Emanuel, head of equity and derivatives strategy at BTIG.
"In terms of calming peoples' nerves, we'd have to give very low grades for what we've seen so far coming from the White House. They spent too much time downplaying this concern and now they're going to shift to the middle," said Art Hogan, chief market strategist at National Securities. "The market has gone in a linear fashion to the panic side of the equation."
The Dow was down 8.1%, or more than 1,900 points in trading Thursday.
Since the night Trump won the presidency, the stock market has taken its cues from his leadership and pro-growth policies. But they're not seeing the White House lead the way on a full-blown stimulus plan that would address both the health crisis and the economic impact from the pandemic.
Investors are also concerned because Congress is scheduled to go into recess, and while the House is considering its own plan, there is no agreement yet on a package that can be accepted by both parties. The Senate Majority Leader Mitch McConnell announced Thursday that the Senate would cancel its recess next week.
Republicans object to the House bill because it omits several measures the president called on Congress to pass, including a payroll tax holiday. But House Minority Leader Kevin McCarthy said it's possible there could be agreement on some issues in the next 24 to 48 hours.
"If we saw a meeting between Trump and [House Speaker Nancy] Pelosi and [Senate Minority Leader Chuck] Schumer, the markets would react positively. Our suspicion is very positively," said Emanuel. He said the market is at a critical level, where if selling continues to accelerate, liquidity problems could start to emerge.
"The market's just flying blind," said Peter Bookvar, chief investment officer at Bleakley Advisory Group. "That's the problem. It's worried about all the ripple effects in terms of the credit environment and banks getting credit lines drawn down, and the cost of capital getting more expensive for anyone that needs financing."
He said the big unknown of how the virus might spread and disrupt the economy is being compounded by the lack of strength in Washington's response. "He did not engender confidence," Boockvar said of the president. "The Democrats and Republicans are on two different planets in terms of getting anything done. There's no question that's weighing on thing as well."
The consensus view is the virus should peak by this summer and the economy should steady and rebound into year end. But analysts caution that there are many unknowns about the virus, which first broke out in China.
Ed Keon, chief investment strategist at QMA, said he expects more selling, but the amount is hard to predict. Keon said the number of new virus cases will have to peak before the market will turn around, and that could be months away. But he also said the government needs to act.
"We've done substantial damage, and there is some value being created. It's not like stocks are so cheap, you have to buy them. I don't think this is the end of the world," said Keon. "The market is looking at this and saying it could be a major problem. So tough action to protect the public, combined with monetary stimulus, could halt the drop. And if we see the number of cases start to peak, while that could take a while, I think we could rally back. That's what it's going to take. You really need to have a public policy response."
Economists say the many proposals from Washington, on targeted loans to impacted sectors, support for furloughed or sick workers and Trump's proposal to suspend payroll taxes would all bolster the economy. The consensus view is that the economy will be impacted most in the second and third quarter before rebounding as virus impact fade later in the year.
"The economic system as we know it is temporarily breaking down. I emphasize temporary because this will pass. ... If you compare it to 9/11, that was huge, but at least we knew what we were up against. In the financial crisis, we were flying blind but you didn't have local restaurants having to shut down," Boockvar said.
The S&P 500 has fallen below 2,640, a key level Emanuel has been watching. "The 200-week moving average is the place that has contained all the sell-offs since 2011," he said. The S&P 500 was down nearly 200 points or 7.9% in afternoon trading and dipped to 2,525.
Emanuel said the market can dip below the 200-week but not stay below it without seriously changing the tone. The market is signaling that Washington needs to move quickly.
"The issue here is the speed of the move, and the idea that at some point you risk a market reaction. As volatile as the equity market has been these last several weeks, you can find liquidity," Emanuel said, adding the psychology could change, if the S&P holds below that level without a coherent plan. "You could have this snowballing effect because of algorithmic and passive investing."
Boockvar said the S&P could fall to the 2,300 level. "I think we probably retest the December, 2018 low intraday of 2,350, closing at about 2,400 . That's what we'll be honing in on," said Boockvar. "We have a potential solvency issue for a lot of companies. I do think this is about buying time for a lot of businesses and households."
Despite some frustrations, Emanuel said the market's love affair with Trump is not over.
"I don't think that anything is not recoverable," he said. "The fact is if you put forth a coordinated, unified effort and you show the public that you're willing to talk to the people that have caused you political discomfort — historical levels of political discomfort — you're saying something."