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The Week That Wiped $3.6 Trillion Off the Stock Market — Update

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.

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February 28, 2020 16:59 ET (21:59 GMT)

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