Markets had their worst week since the financial crisis — blame viral uncertainty
Taking Wall Street's temperature... The S&P 500 boils down the stock prices of the 500 "most valuable" publicly traded companies on American exchanges into a single number. That number helps us quickly answer the question: “How is the US stock market doing?” Here's how the S&P 500's "temperature" changed from February 19th to February 28th (last Friday):
- Feb 19th: 3,386 points.
- Feb 28th: 2,954 points.
- That's a 13% drop in just 7 days of trading.
This isn't the same as '08... Back then, a financial crisis was caused by deep internal problems with our economy (a housing market bubble and massive debt). The threat this time is external: COVID-19 (aka coronavirus) had already shut down big chunks of the Chinese economy — but last week, the economic disruption spread to Italy, South Korea, and Iran.
- There's no cure/vaccine yet: But the Fed's chairman Jerome Powell said Friday that he stands ready to dish out monetary medicine via the central bank's bazooka of cash.
- It's a correction, not a bear market: Since 1946, market corrections with declines of between 10% to 20% have happened 29 times (once every 2.5 years on average) according to Guggenheim Funds. A bear market means a fall of over 20% — hasn't happened (yet).
- The bull market is still bucking: The S&P 500 has more than quadrupled since hitting a bottom in March 2009 — in 11 years, it hasn't dipped more than 20%. That's the longest bull market tracked to date.
Uncertainty is the market's illness... This public health outbreak could be a major hit to the economy, or it could be a blip on the freakout radar. Instead of gambling on those two outcomes, many investors have sold out of risky assets (stocks). The 10-Yr Treasury yield fell to a record low rate, meaning investors are piling into relatively safer government bonds because of uncertainty.
- Worst case: To crush a domestic epidemic, the government could mandate that cities, states, or the whole country stay at home for 30 days, which would contract our economy, shrink profits, and hurt stocks.
- Best case: The disease could remain contained (aka no epidemic at all in the USA), and there's no major disruption to our economy. America's collective stress can return to its normal, elevated state.