By Akane Otani
Eleven years ago, the stock market bottomed out.
Few saw it coming. Warren Buffett told CNBC in March 2009 that the U.S. economy had “fallen off a cliff.” State offices were flooded by people filing for unemployment benefits, and analysts warned the selling could last longer.
Against all odds, stocks turned higher the next day. And they have kept climbing to records with relatively few prolonged interruptions — that is, up until just a few weeks ago.
If investors started the year fairly confident that the run would continue for at least another 12 months, many are rethinking their calls now. The emergence of coronavirus has disrupted everyday life from China to Italy, sent Treasury yields tumbling to record lows and thrown a wrench in Wall Street’s attempts to forecast how the rest of the year will unfold.
“2020 will be the year of the virus,” said David Kelly, chief global strategist at J.P. Morgan Asset Management, adding that he had observed “mayhem” while shopping at warehouse retail chain Costco Wholesale Corp. “We’re not seeing [the epidemic’s] effects on the economy yet, but we could. And in fact, we probably will.”
Making matters worse: Much of the selling in the past couple of weeks appears to have been driven by high-frequency traders and algorithmic strategies, which have exacerbated stock swings especially just after the stock market’s open and before the market’s close, said Michael Drummey, head of trading at Mizuho Americas LLC.
“The real buyers are standing down just to wait and see what happens,” Mr. Drummey said.
So far, the ensuing rout hasn’t been as bad as prior downturns. At its lowest point this year, the S&P 500 was down 13% from its mid-February high — still several percentage points away from tipping into what would qualify as a bear market.
In 2011 and 2018, for example, stocks came within a whisker of entering bear-market territory, which is defined as a 20% drop from the market’s recent high.
The 2011 downdraft occurred amid a downgrade of the U.S. sovereign-credit rating and a fight between the administration and Congress over the country’s debt limit. In late 2018, stocks cratered as fears grew about the impact of the U.S.-China trade war and interest-rate increases by the Federal Reserve.
Today, investors are grappling with entirely different problems. They are worried about the likelihood that global economic growth cools as a result of the coronavirus epidemic.
And markets are pricing in an increasingly grim picture. Shares of companies that rely on consumers going about their everyday activities have tumbled: JPMorgan Chase & Co. is down 22% for the year; United Airlines Holdings Inc. fell 41% and Kohl’s Corp. shed 32%.
Much of investors’ trepidation stems from one indisputable fact: No one knows how bad the epidemic will get.
Forecasts are as varied as one could imagine. Under one scenario, Goldman Sachs Group Inc. sees economic growth slowing sharply in the first half of the year, then rebounding in the following quarters. But in another — in which the epidemic evolves into a more disruptive pandemic — Goldman believes the U.S. economy could fall into recession and the bull run in stocks could end.
Index provider MSCI Inc. built a model to predict how much more stocks could fall if reduced spending due to coronavirus shaves 2 percentage points off global growth in the short term. Under such a scenario, the company believes U.S. stocks could fall as much as 22% from their Feb. 19 high.
However it all unfolds, it appears that Wall Street agrees on one thing. The epidemic has displaced prior threats like stretched valuations, a run-up in growth stocks and a bitter trade feud between the U.S. and China as the No. 1 threat to the bull market.
“This is something different. It affects the way people go about their lives and I think that’s what’s causing angst in the broader economy and feeding into markets,” said Bill Callahan, investment strategist at Schroders PLC.
If there is an upside to the selling, it is that parts of the markets that had looked expensive are now trading at more modest valuations.
Technology stocks, long the leaders of the bull market, had run up so quickly the past few years that some investors worried they were vulnerable to a violent reversal that could take down the broader market. But now many dominant companies are only up modestly for the year, with Microsoft Corp. up 2.5% and Amazon.com Inc. up 2.8%. In some ways, the pullback appears to have brought valuations back to levels that seem more realistic given the current economic environment.
Not all investors have viewed recent declines as necessarily the start of a more painful downturn.
“If you look at this bull market over the past decade plus, there’ve been so many market spasms, and the typical pattern is that the market goes through a mini-correction and then comes out on the other side,” said Dave Donabedian, chief investment officer at CIBC Private Wealth Management.
Still, that hasn’t stopped nervousness from rippling across the investing world, affecting everyone from seasoned traders to individual investors rushing to log into their brokerage accounts.
“I’m a little tired,” joked R.J. Grant, director of equity trading at KBW Inc. He noted the irony of working a job in which punishing bouts of selling are actually a boon for business. “I haven’t opened my personal account,” Mr. Grant said.
Financial-planning company Edelman Financial Engines LLC, which counts more than a million 401(k) investors among its clients, said its call center staffed by financial advisers got four times the number of usual phone calls on Feb. 28.
Even those who believe that the market will ultimately rebound are reluctant to predict when the worst of the selling will be over.
“One negative headline can send the market into a tailspin, but there’s no one positive headline that can give us the all clear,” said Mizuho’s Mr. Drummey.
Write to Akane Otani at firstname.lastname@example.org