Coronavirus Sell-Off Threatens to End U.S. Stock Market's Decade-Long Bull Run

A week of continued sharp stock market falls is threatening to end America's record bull market, which is set to mark its eleventh anniversary next week, as investors reassess the potential economic damage the coronavirus emergency could cause.

A bull market is a run of value growth fueled by optimism that it will continue. A bear market, however, is when the value drops by more than 20 percent in a short period of time. The current bull market in U.S. stocks has run since March 2009 at the end of the financial crisis.

The Dow Jones suffered the steepest one-day fall in its history on Thursday, down 4.4 percent, and is now more 10 percent below its peak. The Nasdaq Composite also closed down 4.6 percent and is more than 10 percent off its peak.

The S&P 500's decline over the past six trading days is the fastest 10 percent correction from an all-time high the index has ever seen, noted Torsten Slok, chief economist Deutsche Bank Securities.

And that—the wiping off of trillions of dollars of market value—may continue. The Dow, S&P 500, and Nasdaq all slid by around 3 percent in trading early on Friday morning.

"The key issue is that investors don't know the duration and severity of this shock," Slok told Newsweek, adding that the "risk of a global recession is rising quickly."

"We need a circuit breaker, which could be news about a vaccine, better news about mortality rates, or news about the spread of the virus beginning to slow down globally."

The World Health Organization has already declared the coronavirus, known formally as COVID-19, a global health emergency. It may soon be declared a pandemic as case numbers rise and spread across the world.

As of Friday morning, there were 83,774 confirmed cases, the vast majority of which are in mainland China, where the coronavirus originated, according to a tracker compiled by John Hopkins University. The number of new cases grows each day.

The virus has a fatality rate of around 2 percent. The tracker puts the current death toll worldwide at 2,867, more than 93 percent of which are in mainland China.

Recent flare-ups in Europe and the Middle East—particularly Italy and Iran—is giving markets new cause for concern. Intensive containment efforts in China are hurting its economy, the second-largest in the world, with a number of knock-on effects elsewhere.

"The virus is disrupting supply chains, and companies are asking workers not to travel and not to go to work, which is lowering the total amount of hours worked in the economy," Slok said.

"At the same time fewer people go out to eat and to movies and sports events and concerts. This all has a negative impact on corporate earnings and GDP, and we simply don't know at this stage the magnitude of these effects."

Alicia Levine, chief strategist at BNY Mellon Investment Management, said their base case is still a one or two quarter hit to China's economic growth and then a "V-shaped" recovery. But she said the downside scenario is "increasingly more likely."

In this scenario, which BNY Mellon has at a 25 percent probability, there is a global pandemic that significantly disrupts trade, demand, and output. "At minimum, we would expect the hit to be over the first half of the year," Levine told Newsweek.

It is in this uncertain context that markets are falling. "Markets hate uncertainty and are faced with uncertain economic impact of contagion," Levine said.

"The sell-off could ultimately hit the consumer which has been holding up the economy. In order to put fresh capital to work, investors need to believe that the hit to growth is temporary and confined to the first-to-second quarters.

"The markets just began to price in a larger and more widespread hit to global growth which will last well past the first quarter… The economic uncertainty comes on top of the unsettled race between the Democrats for the 2020 presidential race. At minimum, earnings estimates for 2020 will go lower but the magnitude of the cut is uncertain."

Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, told Newsweek that the market's main concern is the impact of the coronavirus on corporate earnings, which are likely to be hit by lower consumer spending as fewer people go out.

Consumer spending has been supporting the market, Silverblatt said, because "corporate spending has been disappointing."

He also said the supply issues stemming from lower imports "could create shortages and push up prices" as Chinese production stalls.

Silverblatt told Newsweek the initial market fall was it "repricing that impact of the virus," though he said there is also some "background concern" about politics and stock valuations, with the bull run increasing the earnings-to-valuation ratio for many companies.

"Events will determine if we stop the bull. To date trading has been down, but not uncontrolled, with no panic," Silverblatt said.

Russ Mould, investment director at AJ Bell, noted that the S&P 500's recent drop has taken it back to where it was in October. "Putting the drop in that context it's really not such a big deal," Mould told Newsweek.

"All that has really happened is that some froth has been blown off what had become a pretty bubbly market, with fairly speculative counters like Tesla, Beyond Meat and Virgin Galactic making spectacular gains in early 2020 (and even Bitcoin making a comeback).

"Markets have been on 10-year run and 10 percent corrections have been very—indeed unusually—rare. It is this absence of volatility that has been abnormal, not the sudden spike in it."

Mould said markets are "just waking up to that and while the virus is a big concern, and it is hard to quantify its impact and it is affecting near-term economic activity the sell-off is just as much a reflection of how (over)exuberant markets had become and insensitive to risk."

He added: "There is an old saying about how 'share prices ride the escalator up and the elevator down' and this looks to be another example of that. We've been overdue a correction and now we have got one."

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Traders work during the opening bell at the New York Stock Exchange (NYSE) on February 28, 2020 at Wall Street in New York City. Losses on Wall Street deepened following a bruising open, as global markets were poised to conclude their worst week since 2008 with another rout. Traders work during the opening bell at the New York Stock Exchange NYSE on February 28, 2020 at Wall Street in New York City. - Losses on Wall Street deepened following a bruising open, as global markets were poised to conclude their worst week since 2008 with another rout. JOHANNES EISELE/AFP via Getty Images