By Akane Otani and Peter Santilli
When the S&P 500 closed at a record on Feb. 19, American
stocks seemed untouched by the anxiety around the coronavirus
epidemic that had already rattled investors in other markets,
including bonds, commodities and some foreign shares.
Nine days later, an unnerving reality has set in. The S&P
500 suffered its fastest-ever 10% decline from an all-time high.
The Dow Jones Industrial Average just had its worst week since the
start of the 2008 global financial crisis. Shares of manufacturers,
banks and utilities alike have dropped by double digits.
Andrew Freedman, a 31-year-old finance professional, was in an
Uber in Connecticut on Monday morning when he noticed his driver
fiddling with his phone. When he asked his driver to pay attention
to the road, he was stunned by his response: "Do you mind if I pull
over for a minute? The market's open, I have to sell some
things."
Weary traders describe the past week as one of the most trying
stretches on Wall Street in recent memory. Investors and analysts
pore over the latest news on quarantines, illness counts and death
rates, only to have those figures overtaken by events and
overshadowed by reports that often can't be substantiated.
Portfolio managers are deluged with calls from clients asking
questions no one can answer.
Financial markets are in unsettling new territory. For decades,
discussion of the market had often centered around whether stocks
were in a bubble -- in other words, if their gains had outstripped
economic reality. There was the dot-com bubble. The housing bubble.
And more recently, debate over whether a record-long run in stocks
had made the market ripe for a fall. But the coronavirus represents
something new: a non-financial, exogenous force whose impact on the
global economy is huge and unknowable. The smartest minds on Wall
Street and beyond are having difficulty discerning whether the
epidemic will end up being a short-term disruption, or a more
sustained and lasting threat that upends the lives of millions of
people around the world.
Will the offices and factories and schools of America and Europe
close up like the ones in China did? Will the streets empty out and
shops shutter their doors as people retreat to their homes? How
long will it take for scientists to understand the workings of the
virus and develop medicines that can slow it down? Until the
answers to some of those questions become clearer, traders say, the
market could have trouble finding a bottom.
"Everybody's just trying to figure out where are the next rumors
coming from and where the viruses are hitting and how bad they
are," said Thomas di Galoma, managing director of rates trading at
Seaport Global Securities in New York.
Over the course of seven days of selling, the S&P 500
dropped 13% from its peak -- wiping out $3.6 trillion in market
value.
The yield on the 10-year U.S. Treasury note -- a bedrock of
global finance -- has tumbled to a record low, indicating soaring
prices as traders from other markets seek out the safety of debt
issued by the richest nation in the world.
In the Treasurys market, those who have been trying to fight off
the precipitous slide in bond yields "have gotten stomped out,"
said Mr. di Galoma.
The rout marks the staunchest test yet for a U.S. stock bull
market that started 11 years ago next month. Investors have learned
over the past decade that it pays to stay invested in stocks, a
mindset that has paid off handsomely for those who have used
recession scares in 2011, 2015-2016 and 2018 to add to
shareholdings at lower prices.
At the same time, this rally has been by acclamation the most
hated ever, one in which traditional stock mutual funds suffered
significant outflows and some of the most visible buyers of shares
were corporations pursuing buybacks to reduce their share counts
and put extra cash to work. Households who saw their portfolios
eviscerated by the financial crisis have been reluctant to return
to the market. Even seasoned money managers have at times expressed
disdain for the rally. They've argued that the stock market was
juiced by the extraordinary monetary policy central banks put in
place after the financial crisis. To them, stocks looked ripe for a
selloff long before the coronavirus epidemic surfaced. They just
weren't sure what the trigger would be.
The question for now in markets is whether the steep decline of
the past week will be just another blip on the way to further highs
in this cycle, whether the crash that a handful of bears have been
calling for for years is actually at hand, or whether this is
something even worse that no one foresaw at all.
Tony Roth, chief investment officer at Wilmington Trust
Investment Advisors, said the firm's investment committee had
several emergency meetings before deciding to lower its position in
stocks to less than the benchmark it tracks early in the week.
Before that change, Wilmington Trust held a larger investment in
stocks than its benchmark, and the move from an "overweight"
position to "underweight" marked the first such change in the 5 1/2
years Mr. Roth has been at the firm.
"This is something that's unprecedented in modern times, and the
markets are now reacting in a way that's more realistic," Mr. Roth
said. "We view this as a pretty significant shock to the
system."
The market's rout began in earnest Monday, after news over the
weekend of the virus spreading rapidly in Italy showed investors
that the pandemic had evolved from a Chinese crisis into a global
and increasingly out-of-control problem. That realization sent the
Dow tumbling more than 1,000 points and the yield on the 10-year
U.S. Treasury note fell briefly below an intraday record.
But for many, the market's turning point came Tuesday, when
officials from the U.S. Centers for Disease Control and Prevention
issued a stark warning. Experts now expected the coronavirus to
spread widely throughout the country. Schools and businesses should
brace themselves against a potential outbreak, officials said.
The CDC's warning drove home a point that many had largely
dismissed just weeks prior -- that the U.S. might not escape the
disruption caused by the coronavirus that has already brought to a
halt everyday life in China, Italy, South Korea and other
countries.
Wall Street was quick to respond. By Thursday, analysts at
Goldman Sachs Group Inc. warned they no longer expected U.S.
companies to post any earnings growth at all in 2020. With the
epidemic threatening to evolve into a pandemic, it's likely that
U.S. exporters will see a drop in demand for their products and
that companies will suffer disruptions in their supply chains, said
David Kostin, Goldman's chief U.S. equity strategist.
Investors fled riskier assets across the board, sending the
S&P 500 to correction territory, or a drop of at least 10% from
its most recent high. The speed with which the correction occurred
caught many by surprise; the index's descent, taking just six
trading days, marked its fastest turn into correction territory
ever.
Just after stocks had finished at an all-time high Feb. 19,
Stevie Onuska, a 26-year-old DJ in Nashville, Tenn., was on the
mobile trading app Robinhood trying to make a profit off of bets on
chipmaker Advanced Micro Devices Inc. "I was thinking, cool,
everything's going to stay up. It's had a great record," he
said.
Then the market selloff began. "That was when I was like, 'oh
crap, I'm out,'" he said.
Shares of airlines, hotels and cruise operators -- whose profits
are likely to drop as quarantines and health warnings stop
consumers from traveling -- were among the worst hit in the past
week of selling. Banks also slumped, with Bank of America Corp. and
JPMorgan Chase & Co. bringing their losses for the year to more
than 10% apiece.
Nearly nothing rose in the stock market -- with one exception
being Regeneron Pharmaceuticals Inc., which has been collaborating
with the Department of Health and Human Services to develop
treatments to fight the coronavirus.
As traders rushed to place bets or hedge against further losses,
exchanges were hit by a spike in trading volumes.
The moves weren't limited to so-called active investors, who
pick and choose the companies they want to invest in. Passive
investors who typically buy and hold index-tracking funds for
prolonged periods of time also fled the market -- potentially
exacerbating the selling pressure hitting the stock market.
Trading volumes on the SPDR S&P 500 ETF Trust, an
index-tracking fund that's one of the most-traded securities in the
world, jumped 300% above average on Thursday, according to Jonathan
Krinsky, chief market technician at Bay Crest Partners.
It's exactly the sort of reaction you'd expect for a moment when
investors start doubting the strength of the economy. The S&P
500 fell 12% the week after U.S. officials reopened markets for
trading following the Sept. 11 attacks in 2001. And stocks fell as
much as 13% during the course of the 2003 outbreak of severe acute
respiratory syndrome, or SARS, according to Citigroup Inc. In both
cases, markets ultimately recovered their losses -- but only as it
became more apparent that the global economy would recover. Until
investors have more clarity on a number of issues -- including the
true scope of the infection, and whether scientists will be able to
deliver effective vaccines and treatments -- they say it's likely
that markets will continue to face significant pressure.
Not all investors are in panic mode. In fact, most of the calls
that Jason Pride, chief investment officer for private clients at
Glenmede Trust, has received in the past few days have been from
clients asking when they should step in and buy the dip.
Mr. Pride isn't alarmed yet. He is hopeful that health
officials' efforts to contain the epidemic will prove fruitful, and
that ultimately, the slowdown in economic activity around the world
will prove to be temporary -- not the start of a deep downturn.
But even he isn't giving his clients the all clear. The speed
with which markets have shrunk from their highs has Mr. Pride
skeptical the selloff is at its end.
"We're not there yet," Mr. Pride said.
Amrith Ramkumar contributed to this article.
Write to Akane Otani at akane.otani@wsj.com
(END) Dow Jones Newswires
February 28, 2020 16:59 ET (21:59 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.