Dow Jones Sinks 1,000 Points and Bonds Hit Record Lows

Wall Street goes red again as investors flee stocks and seek haven assets amid ongoing market volatility
March 5, 2020 Updated: March 5, 2020

In a sign of continued market volatility, Wall Street’s losses deepened and the Dow Jones Industrials shed 1,000 points in afternoon trading on Thursday as the coronavirus death toll in the United States rose to 11 and travel-related stocks took a severe beating.

Investors dumped stocks and rushed to the safe havens, boosting gold prices by 1.8 percent and pushing the yield on the benchmark 10-year U.S. Treasury to a new record low.

“With bonds surging and yields at historic lows, concerns are we will get some kind of economic slowdown and it may be worse than initially factored in,” said Andre Bakhos, managing director at New Vines Capital LLC in Bernardsville, New Jersey.

Meanwhile, technology giants Google, Amazon, Facebook, and Microsoft all recommended their employees in Seattle work from home.

The first virus-related death outside of Washington state was noted in California, with the state declaring an emergency.

Epoch Times Photo
US 10-year Treasury note yields fell to a new intraday low, signaling investor worry on March 5, 2020. (Courtesy of TradingView)

‘Excess Optimism’ Vs. ‘Excess Pessimism’

After jumping over 4 percent Wednesday, all major Wall Street stock indexes whipsawed into the red by over 3 percent intraday Thursday, as dueling regimes of central bank stimulus and coronavirus fears continue to pit “excess optimism” against “excess pessimism.”

“The constant injections of liquidity and low rates generate excess optimism on monetary headlines and excess pessimism on epidemic concerns,” economist Daniel Lacalle told The Epoch Times in an emailed statement.

“Market volatility is a direct function of central banks’ misguided response to the coronavirus,” argued Lacalle, who wrote about the downside of central bank interventions in a book called Escape From The Central Bank Trap.

The so-called Wall Street “fear gauge,” or the VIX volatility index, spiked by over 24 percent intraday Thursday to well above its red-line threshold of 31, above which markets are seen as gripped by extreme levels of uncertainty and fear.

“When you look at volatility regimes, once you get above 31 on the VIX you have an uninvestable environment. … There’s no valuation as a catalyst,” explained Hedgeye CEO Keith McCullough, on the Feb. 28 episode of “The Macro Show.”

“If my market signal doesn’t give up greater than 31 on the VIX I’m not buying a damn thing on this ‘dip’ because it’s not a ‘dip,’” McCullough added.

Epoch Times Photo
The Wall Street “fear gauge,” or the VIX volatility measure, spiked to above 40 intraday on March 5, 2020. (Courtesy of TradingView)

“Markets are driven by greed and fear, and it is apparent that fear has overtaken greed as the underlying motivation,” said Robert Johnson, Professor of Finance at Heider College of Business, Creighton University.

“Until we get some clarity about the extent and likely duration of the coronavirus outbreak, we will continue to witness wild swings in the markets,” he told The Epoch Times in an emailed statement.

‘Volatility May Be Here To Stay’

The Federal Reserve announced a 50 basis point rate cut on Tuesday, which was first met with investor enthusiasm but quickly followed by a selloff amid worries the central bank was acting on bad news that markets were not aware of.

“No economic data released over the last week would justify an unscheduled rate cut, let alone the largest rate cut since the financial crisis,” said Allen Sukholitsky, chief macro strategist at Xallarap Advisory.

He argued that last week’s stock market dip was a normal correction that “was well within historical averages” and that instead of reassuring investors, the Fed’s knee-jerk rate cut scared them out of stocks and into the safety of bonds “because they sense inconsistency between this rate cut and the Fed’s statement that ‘fundamentals of the U.S. economy remain strong.’”

Lacalle said investors should expect the kind of big market swings that have taken place in recent days to persist.

“Central banks have suppressed volatility for many years and now the next policy moves generate diminishing returns, so in my opinion volatility may be here to stay because central banks have exhausted the financial repression tools trying to disguise risk,” he added.

Reuters contributed to this report.

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