For the first time since the 2007-08 financial crisis, the stock market triggered so-called “circuit breaker” rules that halted trading for 15 minutes. What does this break in trading mean? And what will happen next? With many investors now in panic mode, let’s take a look at what has stocks so deeply in the red.
At the most surface level, the 7% drop in the S&P 500 triggered a 15-minute halt in trading. And Monday’s drop follows several days of smaller declines, brought about by the coronavirus from China.
Although the virus has been making headlines since January, the stock market mostly shrugged off the outbreak. That all changed when Italian officials confirmed Covid-19 had hit the European nation.
But why this drop, now? Yes, it’s true the markets have already been reacting to the spread of the virus in Italy. But many think that news Sunday night and Monday morning elevated panic even further.
Over 100,000 people worldwide have been infected, and Italy is quarantining 16 million people in its northern regions. This has many people fearing that the worst of the epidemic is still far away.
Oil Prices and U.S. Bonds Tumble
And if that wasn’t enough, an oil price war and shockingly low U.S. Treasury yields have investors in panic. OPEC, a coalition of oil-producing nations, failed to strike a deal with Russia over the weekend. What exactly was this deal? OPEC wanted Russia to agree to a crude production cut to stabilize the market. As the coronavirus ravages the global economy, the deal was intended stabilize falling oil prices across the world.
But on Friday, Russia said no. And to make matters worse, Saudi Arabia, an OPEC member, started an “all-out price war” on Monday, cutting the price of its crude oil. The move, which sent oil prices down 20%, will flood the market with Saudi oil as the nation tries to take back market share from Northern American producers.
For those in the U.S., this invokes fears among shale producers, who are already struggling.
In this lions, tigers and bears situation, investors are also now grappling with rock-bottom U.S. Treasury note yields. The 10-year bond has dropped below 0.5%, marking a record low. This matters because these bonds are seen as a source of safety, and plummeting yields are far from that.
So what’s next? Investors will be waiting for updates on the coronavirus, the price war and falling bond yields on Monday. If the S&P 500 drops 13%, that would trigger another 15-minute halt. Note that a 20% decline would end today’s trading.
Sarah Smith is a Web Editor for InvestorPlace.com. As of this writing she did not hold any of the aforementioned securities.