Wall Street prepares for another unruly week

Even those on trading desks have struggled to keep pace with the market tumult.

  • By Julia-Ambra Verlaine and Akane Otani,
  • The Wall Street Journal
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Global investors are bracing for another hair-raising ride, after a week of frantic and at times disorderly trading.

The Dow industrials have dropped seven straight days entering trading Monday, posting their steepest weekly decline since the financial crisis. Their 14% pullback since Feb. 12 places the longest-ever U.S. stock rally in jeopardy of falling into a “bear market,” marking a 20% decline from a recent high.

The rout has been by the book to some extent. A roaring rally in government bonds has taken the yield on the 10-year U.S. Treasury to a record low of 1.127%. The markets for oil and copper, whose prices reflect in part global economic expectations, have fallen sharply.

But investors have been gobsmacked by unexpected developments elsewhere. Gold raced through early 2020 to its highest level in seven years, before dropping 4.6% Friday in its sharpest drop since 2013. High-yield bond funds posted their largest-ever outflow by one measure this past week. The technology-laden Nasdaq Composite Index (.IXIC) surged late Friday to close higher for the first time since its record close on Feb. 19, while the Dow (.DJI) and S&P 500 (.SPX) both declined.

Adding to investors’ worries, weekend data from China showed the country’s economy has taken even more of a hit from the epidemic than some had anticipated. Sentiment among manufacturers’ purchasing managers, as well as an index tracking purchasing plans in services industries, both fell to a record low in February.

The market tumult has left Wall Street scrambling. Fixed-income traders at JP Morgan Chase & Co. and trading teams at Barclays PLC met late in the week, focusing on preparing for further declines in stocks and commodities. A Federal Reserve statement Friday afternoon promising appropriate action wasn’t enough to quell nerves on many trading desks. Even those who counsel patience are for now expecting a period of intense volatility.

“When you are getting new information by the minute or by the hour, that creates anxiety in markets,” said Joe Amato, president and chief investment officer of equities at Neuberger Berman Group LLC. “People don’t want to take risk.”

The turmoil is increasing trading activity among investors in retirement funds. Alight Solutions, which tracks 401(k) trading activity among investors at large employers, said trading volumes on Thursday were 11.4 times higher than normal. Since 2008, there have only been two other days when trading volumes exceeded 11 times the historical average, says the company.

The violent downdraft in stocks has created an acute need for cash. Declines in gold and other areas of the market often associated with stability, like the shares of utilities firms, show that investors are being forced to raise cash to make up for losses from stocks, some traders said—including margin calls to investors who had used stocks as collateral to buy other securities. With the value of those positions shrinking substantially, banks can demand repayment, triggering forced sales of unrelated assets.

“You have a tremendous amount of people who needed cash,” said George Gero, managing director at RBC Wealth Management. “There is no haven at the moment with the exception of Treasurys.”

A Bank of America survey of fund managers in February showed investors’ positioning in cash at the lowest levels since March 2013.

Friday capped one of the worst two-week spans for high-yield credit since the financial crisis, marking the end of a long spell of largely placid trading. Analysts say moves haven’t been this violent since 2011, citing jumps in credit-default swap indexes and outflows from high-yield funds.

The average bid for S&P Global Market Intelligence’s LCD 15-bond sample of high-yield issues tumbled 2.47 percentage points over the past week, wiping out all 2020 gains on Thursday. Markit’s high-yield CDX index dropped nearly 5 points in two weeks, the steepest decline for any comparable period since 2011.

The action is evidence that the rapid evolution of coronavirus from an epidemic to what appears to be a pandemic has paralyzed Wall Street, some investors say, because there are too many unanswered questions.

“It’s a brand new thing,” said Chris Stanton, chief investment officer at Sunrise Capital Partners LLC, a California-based quantitative fund. “If the next headline says Disney is shutting its theme parks, we will start seeing moves like 2008.”

For now, many portfolio managers and investors believe the storm will pass, leaving intact a bull market that started in 2009 and has pushed the Dow up some 300%. Some took heart at the frantic late-afternoon rally that narrowed Friday’s losses, while others said they believe the selling is likely to prove overdone.

“I still think we’re in a secular bull market,” said Nancy Tengler, chief investment officer at Laffer Tengler Investments.

Yet even those who believe the coronavirus scare will blow over are bracing for additional volatility as investors struggle to discern the true impact of the illness on global markets and economies.

Ms. Tengler holds some options to hedge against stock declines. The move wasn’t even primarily prompted by worries about the coronavirus. Months before, she had already had a feeling that stocks were due for a pullback, given the extent to which they had risen despite a lackluster year of earnings in 2019 and muted growth.

She wasn’t sure what the trigger for the decline would be. But she believed it was coming nevertheless. The options have more than tripled in value, so Ms. Tengler plans on selling some of them to take in a profit.

Some of her clients haven’t been as farsighted. She said she got a text from a client as the market selloff picked up steam last week.

“Wow, you were right,” the client said. “I wish I had hedged.”

David Hodari and Amrith Ramkumar contributed to this article.

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