The Week That Wiped $3.6 Trillion Off The Stock Market (#GotBitcoin?)

U.S. stocks were at record levels just last week, seemingly unaffected by fears that the coronavirus could dent the global economy. Then reality took hold. The Week That Wiped $3.6 Trillion Off The Stock Market (#GotBitcoin?)

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 toughest 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 5½ 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.

But even he isn’t giving his clients the all clear. The speed with which markets have shrunk from their highs has Mr. Pride skeptical the selloff is at its end.

“We’re not there yet,” Mr. Pride said.

Updated: 3-9-2020

Circuit Breaker Halts Stock Trading For First Time Since 1997

Stock trading halted for 15 minutes after S&P 500 falls 7%.

Stock trading was briefly halted Monday for the first time since 1997 after a tumultuous selloff triggered an automatic curb on trading.

Just minutes after the stock market opened, the S&P 500 fell 7% from its previous close—triggering a circuit breaker that halted trading across the entire stock market for 15 minutes. When trading resumed at 9:49 a.m. ET, major indexes managed to come off their lows and hold above them for the rest of the morning.

Stocks then lost ground in the final hours of trading, with the S&P 500 ending down 7.6%.

The modest reprieve in selling immediately after the trading halt suggested the circuit breaker succeeded in doing what regulators and exchange officials had designed it to do decades ago: give hedge funds, institutional investors and day traders in the midst of a sharp selloff some time to pause and reassess the situation before firing off more orders.

“Cooler heads are prevailing,” said John Spensieri, head of U.S. equity trading at Stifel. He added that for many on Stifel’s trading desk, Monday marked the first time in their careers that they had witnessed a marketwide circuit breaker being triggered.

“The systems, as designed, worked,” said Jonathan Corpina, a senior managing partner at broker-dealer Meridian Equity Partners. “As of now, those were the lows for the day.”

Officials introduced circuit breakers after the Black Monday crash of 1987, which sent the S&P 500 tumbling 20%. Many believed the crash had been exacerbated by exchanges flooded by buy and sell orders, and that a mechanism to temporarily halt trading might have helped clear the backlog and calm markets. That led to the creation of the circuit breaker.

But even though the mechanism’s history dates back decades, before Monday, there was only one other instance—Oct. 27, 1997—when marketwide circuit breakers were triggered, said a New York Stock Exchange spokeswoman.

On that day, nicknamed “Bloody Monday” by the traders who lived through it, exchanges halted trading twice: once for a half-hour when the Dow Jones Industrial Average fell 350 points, and then the second time for the rest of the trading day when the blue-chip average fell 550 points, which at the time was equivalent to a 7.2% drop. At the time, the threshold for circuit breakers being triggered was pegged to point changes in the Dow.

The 1997 episode quickly spurred debate among exchange officials, traders and the Securities and Exchange Commission about whether they should shift to percentage levels, not points, to determine when to halt trading—especially since the stock market’s ascent had rendered a move of 350 points in the Dow less and less significant on a percentage basis.

Officials have subsequently revised the circuit breakers multiple times, most recently after the flash crash of 2010.

On that day, the Dow Jones Industrial Average fell nearly 1,000 points, or 9.2%, and then rebounded in a matter of minutes, spurring panic among traders scrambling to figure out what spurred the sharp moves. Because the threshold for an initial marketwide trading halt was set at a 10% decline in the Dow, the frenzied trading was allowed to continue.

In the aftermath of the flash crash, officials revised their guidelines for trading halts, resulting in the system that is in place today.

Once the S&P 500 drops 7% from its previous close before 3:25 p.m. ET, trading is halted for 15 minutes. After that, it would take a drop of 13% before 3:25 p.m.—in this case, the S&P 500 falling to 2585.96—for the next circuit breaker to kick in. That would kick off another 15-minute trading halt.

The final threshold for a trading halt is pegged to a decline of 20%. Once the S&P 500 has fallen that much in a single day, trading would be halted for the rest of the day. The market has never triggered trading halts tied to 13% and 20% declines since modern circuit-breaker guidelines went into effect in 2013.

Updated: 4-15-2020

Wall Street Explores Changes to Circuit Breakers After Coronavirus Crash

Financial firms look at making trading halts less likely immediately after the opening bell.

Financial heavyweights including Morgan Stanley, Citadel Securities and BlackRock Inc. are exploring potential changes to the U.S. stock market’s circuit breakers after the rarely used mechanisms repeatedly halted trading last month.

The firms belong to a loose industry task force made up mainly of brokerages, trading firms and exchanges that held several rounds of discussions in recent weeks on circuit breakers, said people familiar with the matter. The group is reviewing how circuit breakers worked during the unprecedented selloff in March triggered by concern over the coronavirus pandemic and is identifying possible fixes to recommend to the Securities and Exchange Commission.

SEC officials have taken part in the group’s calls, the people said.

A major focus of the task force has been a potential revision of the circuit-breaker rules to make it less likely for a marketwide trading halt to occur right after the opening bell at 9:30 a.m. ET, the people said. That can happen if global market sentiment has sharply deteriorated overnight, putting stocks on track for big losses.

During three of the four occasions when circuit breakers were tripped last month, the halt came within a few minutes of the open when the S&P 500 dropped 7%. On March 16, trading was halted one second after 9:30 a.m. That prompted criticism that there was no point in opening the stock market only to halt trading immediately.

Still, loosening the circuit-breaker rules to let stock indexes swing more freely would chip away at a decades-old system designed to protect investors during crashes.

Circuit breakers are meant to thwart financial panics by giving investors time to pause and digest fast-moving information. The SEC first mandated marketwide circuit breakers after the Black Monday crash of 1987 and adjusted them in response to the 2010 flash crash.

Under current rules, a 7% drop in the S&P 500 triggers a 15-minute halt. If the market goes on to fall 13%, trading is halted for another 15 minutes. If it decreases 20%, trading is halted for the rest of the day. The latter two scenarios have never occurred.

Several members of the task force, according to the people familiar with the matter, suggested relaxing the circuit-breaker regime at the start of the day—between 9:30 a.m. and 9:45 a.m., for instance. Under such an approach, a drop greater than 7% would be required to halt trading during that period, the people said.

One idea was to allow the market to open down 7% but to halt trading if losses accelerated and the S&P 500 hit another threshold, such as 13%, they said. Some task-force participants questioned the need for having circuit breakers at all at the open, but others countered that it was important to retain some protections at 9:30 a.m., the people said. So far, the group hasn’t come to a consensus on any changes.

Any revisions to the circuit breakers would need to be approved by the SEC in a lengthy process that would be open to public debate. The task force expects to study data from March before issuing any recommendations, the people said. It is possible the group might not recommend any changes after it finishes that review.

“The SEC is pleased that different players in the industry are working together to assess how our market structure regulatory mechanisms have worked in real market conditions, and whether any changes might be warranted,” Brett Redfearn, director of the SEC’s division of trading and markets, said in a statement.

Exchanges and other firms agreed to form the task force last year, with SEC encouragement, before the Covid-19 pandemic sent markets into a tailspin, the people familiar with the matter said. The group had several conference calls in March when circuit breakers were tripped for the first time since 1997. That injected momentum into what otherwise would have been theoretical discussions, the people said.

The task force is also debating how to fix dislocations such as those that emerged recently between a key futures contract and an exchange-traded fund that both track the S&P 500, they said.

Prices for S&P 500 futures and the SPDR S&P 500 ETF Trust, best known by its ticker, SPY, almost always move in tandem. But if markets swing sharply overnight, gaps can appear between them, potentially sowing confusion over where stocks are likely to open in the morning.

A longstanding rule of the futures-exchange operator CME Group Inc. limits overnight price swings in the futures to 5% up or down. No similar limits govern the trading of SPY in the after-hours trading session from 4 p.m. to 8 p.m., or in premarket trading from 4 a.m. to 9:30 a.m. On March 16, at 9:20 a.m., for example, SPY was down 11% from its previous closing value, while the futures were stuck at their 5% limit-down level.

BlackRock and other task-force members are in favor of greater harmonization in how equities and futures are allowed to trade overnight, said a person familiar with the matter, but the details still need to be hashed out.

CME has said ETFs should face restrictions so they are aligned with its own limits on S&P 500 futures. Members of the circuit-breaker group have privately urged CME, also a member of the task force, to widen its 5% overnight limits, potentially to 7%, the people said.

But CME has resisted such a step. Expanding the 5% limits on S&P 500 futures in overnight trading when stock exchanges are closed would be “reckless,” CME Chairman and Chief Executive Terrence Duffy said in an interview.

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