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Wall Street has lost its nerve. What will it take to get it back?
[NEW YORK] Wall Street has often adopted a simple playbook when facing a stock market plunge: "Buy the dip." Not lately.
In recent years, investors who jumped on downturns as chances to buy shares at bargain prices have profited from the move. Their buying, in turn, helped stabilise prices, snuffing out slumps before they morphed into panics.
But last week, as coronavirus cases turned up around the world and new information kept pouring in — photographs of deserted business districts in Milan, a stark warning from an official at the Centers for Disease Control and Prevention on Tuesday, news that a single Google employee in Switzerland had tested positive for the virus Friday — big investors across Wall Street lost their nerve, interpreting the steep fall in share prices not as an invitation to go bargain-hunting but as a reason to dump more stock.
"This is one of the few times in recent history where we've seen them meeting that with selling and not buying," said Mike Lewis, head of US equity cash trading at Barclays, referring to big investors like hedge funds and pension funds that tend to employ sophisticated trading strategies.
The result: the worst weekly rout for stocks since the 2008 financial crisis.
The coming week will be another test for investors. Wall Street culture fetishises forecasts and figures. Analysts and investors are rewarded for their ability to correctly gauge risk, incorporate those assessments into accurate forecasts and then make trades based on them. As a result, investors despise uncertainty, because it makes it difficult to generate good guesses about the future.
And uncertainty is pervasive right now. The coronavirus — highly contagious, with new cases emerging daily, and millions still facing lockdowns in the world's second-largest economy, China — is creating exactly the kind of unpredictability that makes investors fret. There is little clarity about how long it will take governments and health officials to contain the virus, leading to a gloomy prognosis for global economic growth. Supply chains remain deeply disrupted. Consumer spending may suffer if daily life is disrupted by the virus.
Markets are as precarious as they've been since stocks started climbing in March 2009 after the financial crisis. In such cases, investors tend to sell to limit their losses or wait for clarity to emerge, which could take weeks, if not months.
"You need to show that the virus is under control," said Jack Janasiewicz, a portfolio manager with Natixis Investment Managers. "Until that happens, we're going to be in these volatile swings."
But instead, federal health officials have warned that the virus will spread. Over the coming days, Americans will probably hear updates on new infections, and perhaps deaths. (The first reported virus death in the United States, of a man in Washington state, was announced Saturday.)
Already, during last week's panic, updates on even a single new infection were at times enough to move multitrillion-dollar financial markets. The most recent economic data has been bleak. Official Chinese surveys of activity in the factory sector released over the weekend, showed even deeper contraction than expected.
The jitters could continue.
"Anytime you see another headline, you almost instantaneously see a reaction in the markets," said Subadra Rajappa, head of US rates strategy at Société Générale in New York, said Friday. "Clearly there's a lot of skittishness."
Even if, as is now expected, the Federal Reserve cuts interest rates this month, an action that has been a balm for market woes over the past decade, that may not be enough to put things back on a surer footing.
"The playbook for the last 10 years, you should throw out the window," Alan Fournier, who trades his own money through a family office in Summit, New Jersey. "Because this virus doesn't care what the Fed does."
Since the 2008 financial crisis ended, America's decadelong economic expansion has hardly been smooth. But when growth faltered, the Fed has reliably stepped in to act — pumping new money into financial markets or cutting interest rates, or both.
Those actions kept the economy chugging, and helped stocks rebound. The dynamic repeatedly rewarded investors who used market setbacks as buying opportunities.
But this time, traders, investors and analysts expect any action from the Fed to have limited effect, at least on the economy. Unlike previous periods of stress, including the US government shutdown fights in 2011 or the trade war with China that started in 2018, the current crisis of confidence is tied more to epidemiology than economics.
So whether the market turns around depends on those who make health policy and communicate information to the public, rather than officials who determine monetary policy.
The Fed can still help calm market fears to some extent. On Friday, a brief statement from the Fed that it stands ready to support the economy helped the market rally off the worst of its lows. More soothing words could come in the days ahead, potentially reversing some of last week's decline in stocks.
But even if markets see a short-term bounce, it could take longer to restore the investor confidence — or complacency — that pushed stocks to record highs a little more than a week ago. After all, investors just endured the second-worst week for the S&P 500 stock index since 1941 and one of the fastest 10 per cent declines on record. Nose dives like that are psychological events for investors as much as financial ones.
"The positive economic outlook that people had for 2020 and beyond that was not realistic," said Chris Rupkey, chief financial economist at MUFG Union Bank. "The coronavirus helped bring that down and the stock market helped bring that down. But I don't think you can put Humpty Dumpty back on the wall again."