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A ‘fairly measured’ stock sell-off is on the brink of turning irrational

It’s early in the coronavirus outbreak, but Wall Street’s correction could easily become a bear market

US markets continued their downward plunge Friday as continuing fears of a coronavirus pandemic gave Wall Street its worst week since 2008.Scott Heins/Getty

Stock market reversals are never pretty.

Professional traders and mom-and-pop investors alike abandoned stocks last week on concerns that the coronavirus epidemic will spread to billions of people around the world, disrupt our work and family lives, and ravage the economy. More than $3 trillion in market value was wiped out, the worst week for Wall Street since the mortgage crisis paralyzed the financial system in 2008.

There have been just 76 cases reported in the United States — out of nearly 88,400 worldwide — and two deaths. Have investors overreacted? Not yet. But be prepared: The sell-off isn’t over.


The Standard & Poor’s 500 index, a benchmark of the largest US stocks, is down 13 percent since its Feb. 19 record high. The index tumbled more than 10 percent from its peak in just six trading days, the fastest correction we’ve ever seen. The Dow Jones industrial average and tech-heavy Nasdaq have fallen 14 percent and 13 percent from their respective peaks.

The declines so far have been “fairly measured,” said Dec Mullarkey, managing director of investment strategy at SLC Management, the asset management arm of the insurer Sun Life Financial, in Wellesley.

Investors are cutting their estimates of stock values based mostly on the increasing likelihood that US corporate earnings, which had been expected to accelerate in 2020, will take a big hit from reduced production, distribution, and customer demand in China, the epicenter of the outbreak.

US companies will “will generate no earnings growth in 2020,” analysts at Goldman Sachs said Thursday. Companies from Apple to Anheuser-Busch InBev to Boston Scientific of Marlborough have said fallout from China would hurt business.

Still, with the outbreak in its early stages in the United States, we should brace for more selling, and it may not be so rational.


“There is likely a second leg to this market downturn which could well result in an overreaction,” Mullarkey said Friday. As US infections inevitably rise and quickly accelerate, he said, the impact on workers, productivity, and consumer demand could slow growth even more than economists have forecast for this year.

Don’t be surprised if the record-long bull market, which emerged from the rubble of the Great Recession in March 2009, becomes collateral damage of the coronavirus crisis as investors grow increasingly panicked.

For some context, consider the correction in late 2018 that almost became a bear market — the declines by the S&P 500 and Dow were just shy of 20 percent. It was triggered by the relatively benign and well-telegraphed attempt by the Federal Reserve to restore interest rates to more normal levels. Investors essentially threw a tantrum that forced the Fed to reverse course.

On the other extreme, the 2008 market crash, which cut stock prices by more than 50 percent, was fueled by staggering mortgage and derivative-related losses that pushed the banking system to the brink of collapse and cost millions of Americans their homes.

“This is nowhere near as scary as 2008,” said Bill Stromberg, chief executive of the fund manager T. Rowe Price Group in Baltimore, because banks are not failing and the world isn’t facing a global credit crunch.

Nonetheless, the coronavirus meltdown is gaining momentum when the true economic damage is still modest. Public health officials are not sure just how deadly the disease is and whether this country is better prepared than China or South Korea to contain it.


Confronted by a lot of bad information, 24/7 news alerts about new cases, and conflicting messages from the federal government, investors can’t rule out a nightmare scenario: millions of people around the world dead, many more quarantined, financial markets in disarray, a recession.

Marc Lipsitch, a professor of epidemiology at Harvard’s T.H. Chan School of Public Health, has forecast that anywhere from 40 percent to 70 percent of the global population is likely to be infected over the coming year, although he notes that not all of those infected would get sick.

At the bottom of this range, and even if the mortality rate proves to be about the same as severe seasonal flu, or 0.1 percent (which some experts say is possible), that adds up to some 3 million coronavirus fatalities. That compares with annual seasonal flu deaths worldwide of 290,000 to 650,000, depending on the year, according to the World Health Organization. About 775 people died during the 2003 SARS outbreak, and as of November, MERS deaths had reached nearly 860.

OK, time to take a deep breath.

Our worst fears about the coronavirus could become reality, but that’s hardly the only possible outcome — or even the most probable. Investors are prone to panic until there are enough facts — not politically driven fear-mongering or sugarcoating — to get a clearer picture of the public health and economic risks.


The key question is “Do we have anything to fear besides fear itself?” said Peter Ireland, an economics professor at Boston College.

“What if the virus stops spreading next week, and looks once again to be contained, as it did as recently as last week? What happens if it just dies down as the weather improves, the way flu season always does?” he said. “I certainly don’t want to say that there are no problems and that everything will be OK for sure. But I do think that markets are reacting out of fear of the worst-possible scenarios, whereas the most likely outcome is still that the spread of coronavirus in the US and Europe is contained.”

Investors got a bit of comforting news from the Federal Reserve late Friday. The central bank said it was prepared to cut interest rates if necessary to blunt the outbreak’s economic blow. Stocks recovered somewhat after the statement from chairman Jerome Powell.

And equities in Asia on Monday began reversing early-in-the day declines in wild trading amid signs of support from central banks. Losses in sovereign bond yields eased.

Feeling any better?

While the Fed might have calmed some frayed nerves, rate cuts can’t inoculate the economy fully from the economic damage already inflicted on China, where all but a fraction of the nearly 3,000 reported deaths have occurred, according to data tracked by researchers at Johns Hopkins University.


“The cost of borrowing is not an issue here, and rate cuts might ease financial conditions marginally, but generally central banks will be wasting precious room to cut later, when rate cuts might actually help,” said Megan E. Greene, an economist and senior fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School.

“With Chinese firms well integrated into global supply chains, if we can’t get every cog up and running again, the entire supply chain might as well be down,” Greene said. “Western firms are looking at having to shift their supply chains. If [that] were easy or cheap, firms already would have done it when the trade war broke out.”

Bear markets are inevitable, even if it’s been 11 years since we had one. Ditto recessions.

The coronavirus epidemic could well be the so-called black swan event — unpredictable, rare, and extreme — that ends the streak.

Shirley Leung of the Globe staff contributed to this report.

Larry Edelman can be reached at Follow him @GlobeNewsEd.