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Fear of the spiraling virus causes financial carnage

There is nothing that investors hate more than uncertainty. Right now, that's all there is.

Uncertainty about the severity and duration of the coronavirus epidemic, tearing the world apart at a speed similar to light. Uncertainty about how the global economy will fare with the closure of factories, airports, shops, schools and entire cities. Uncertainty about the ability of governments to contain the disease and the power of central banks to offset its economic fallout. Uncertainty over the duration of all this uncertainty.

Growing fears have provoked financial carnage. The S&P 500 has dropped 12% since February 19, the strongest dive in nine years. The plunge wiped out about $ 3 trillion in wealth.

In the past two weeks, even decent days have been tinged with a scary aura. Friday afternoon, the S&P was about to lose more than 2%, before the index made up for its losses amid a buying blizzard in the moments before the closing bell . (A similar last-minute surge the previous Friday made a horrible week a little less bad.) For all the turbulence causing heartburn, the S&P ended this week mostly flat.

Market records fall like dominoes. The Dow Jones industrial average, for example, experienced both its largest point drop in a day (1,191 on February 27) and its largest gain (1,294 Monday).

Behind the turbulence there is confusion and anxiety, and the feeling that the modern world is in an unprecedented situation. There is no manual for this, said Derek Devens, a portfolio manager of the fund company Neuberger Berman. It was very difficult for people to digest.

the financial chaos extends beyond the stock market.

Many companies are essentially frozen in place, unable to predict how the coronavirus could affect their operations. Their immediate task is to understand how to continue operating while ensuring that their employees are safe. In Silicon Valley, Apple and Twitter have told people to work from home. In New York, Bank of America and JPMorgan Chase have sent small parts of their trading desks to the suburbs to have rescue teams to run business in an emergency.

As the global economy is about to contract, demand for oil is falling, causing the crude price of crude. As investors flee risk, gold prices have skyrocketed. The safest assets issued by the United States government have increased their prices. For the first time, interest rates on 10-year T-bills fell to less than 1% this week, falling to a record low of 0.71% on Friday.

A sudden outbreak of global disease is not the kind of risk that many market players have been trained to respond to. Few investors are epidemiologists. The most sophisticated financial models and the fastest trading algorithms are evolving blindly.

You can't even put a model on that model, because it's not really something we've seen before, said Michael Feroli, chief economist in the United States at JPMorgan.

In financial circles, there is a term for such events: a black swan. They are rare but disturbing. And they are impossible to predict.

The terrorist attacks of September 11, 2001 were a catastrophic example, a so-called exogenous shock to the markets, which originated outside the financial system itself. Most often, market turmoil comes from within: the mortgage crisis and the collapse of Lehman Brothers in 2008; tremor in the junk bond market in 1987 and 1989; and the disappearance of the giant hedge fund Long-Term Capital Management in 1998.

In 2001, no one knew whether the attacks on the World Trade Center and the Pentagon were only the first in a series of strikes. With the spread of the coronavirus, no one knows how deadly and widespread it will prove to be, or how it can disrupt people's lives, or its impact on the national and global economy.

Uncertainty breeds fear and fear breeds panic.

Investors have gone from thinking everything was perfect to hopeless, said Howard Marks, co-chair of alternative asset manager Oaktree Capital Management. People think, I'm going to walk on bodies on Park Avenue, like the black plague. It’s panic.

Fears can come true. Thursday, the venture capital company Sequoia Capital directed the young tech companies he has invested in to question all assumptions about your business and consider taking preventative measures to prepare for a downturn, such as cutting spending and carefully considering the size of their workforce. Sequoia called the coronavirus the black swan of 2020.

In some ways, exogenous shocks are even more fear and uncertainty than traditional financial crises, as investors have no experience to rely on. Monetary policy, and the central banks that use it can be effective in fighting financial turmoil, as the Federal Reserve managed to do during the 2008 crisis, but this has no effect on viruses.

What particularly worries investors now is the seeming impotence of the institutions that seem to have the greatest chance of appeasing the markets.

When the Fed announced Tuesday an emergency decision to cut benchmark interest rates by half a percentage point, the stock markets rallied for about 15 minutes before resuming their spiral bearish.

One reason: investors feared that the Fed, whose monetary policy has been the key to the rally in the stock markets for a long time, is running out of options to stimulate the economy. Eric Rosengren, president of the Federal Reserve Bank of Boston, said on Friday that the central bank may have to weigh new measures to counter a recession, including buying a wider range of assets.

The reality is that no one really knows how to calm the markets, let alone how to contain the virus epidemic. Modest optimistic news, the Department of Labor announced Friday morning that the US economy had added 273,000 jobs in February without doing the job.

Today you had this great job report, said Jay Foreman, general manager of the toy company Basic Fun. It's going to be the exact opposite next month. I can't imagine anyone hiring someone this month, unless they sell hand sanitizer.

He said the coronavirus crisis forced him to fire 18 of the company's 175 employees 10 in the United States, six in Hong Kong and two in Europe.

Investors were also not appeased by the signing by President Trumps of a bill to provide $ 8.3 billion to fight the coronavirus or television insurance of Larry Kudlow, the best White House economic advisor.

There is really no response from the administration or the authorities telling people to calm down and there is a plan, said Gennadiy Goldberg, strategist at TD Securities in New York. It certainly feels like there is no plan, and I get the impression that this is what the markets are reacting to.

It's a recipe for even crazier days in the weeks to come. In some Wall Street pharmacies, the antacid might be in demand as much as the hand sanitizer.

When there is unprecedented uncertainty, which we are dealing with, we could have high volatility for a while, said Julian Emanuel, strategist at brokerage BTIG.

He noted that Mondays are often turbulent days because investors spent a few days cooking up the events. What you see in the markets, very often, these things happen over the weekend, he said.

No matter how intense, panics don't last forever. When the markets reopened after the September 11 attacks, the Dow Jones fell more than 14% in a week. This turned out to be a buying opportunity; in one month, the stocks recovered their losses.

There will come a day when we hit a floor, said Oaktree co-chair Mr. Marks. We do not know when or where this background will be found. But all major investments start with discomfort. You earn a lot of money by buying things that no one else will buy.

The reports were provided by Ana Swanson, Jeanna Smialek, Emily Flitter, Mike Isaac and Karen Weise.

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