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Investors shy away from risk as coronavirus rattles markets

LOS ANGELES (AP) — This week’s big sell-off on Wall Street suggests stocks have finally caught up to the bond market, where fear of an economic slowdown has been evident for months. Signs that the new coronavirus that originated in China is now spreading to other parts of the world rattled investors, intensifying worries about the damage that the outbreak could cause to the global economy and corporate profits.

The anxiety led traders to do something they haven't been doing lately — move away from riskier holdings. They dumped stocks, handing the major U.S. indexes their worst single-day decline in two years Monday. The S&P 500 was on track for its biggest weekly loss since the early months of the 2008 financial crisis.

Investors also continued to shovel money into U.S. government bonds. The yield on the 10-year Treasury note kept setting record lows as the week went on. Last week, the 30-year Treasury yield hit an all-time low.

“There's a lot of money going into bonds,” said Willie Delwiche, investment strategist at Baird. “It doesn't speak to confidence in the economy, that's for sure." The virus outbreak has now infected more than 82,000 people globally and continues spreading. On Tuesday, U.S. health officials called on Americans to be prepared for the disease to spread in the United States.

Until this week, stocks had been running at all-time highs, having bounced back from stumbles in late January as investors bet that share prices would move higher on expectations of improved earnings growth this year.

But even before Apple, Walmart, Microsoft and other big companies warned about the financial fallout from factory closures, travel restrictions and other measures taken by China to contain the disease, traders had been parking some of their money in U.S. government bonds. That shift drove bond prices higher and pulled their yields lower.

The 10-year Treasury yield, which is a benchmark for interest rates on mortgages and other loans, ended 2019 at 1.92%. As of Thursday, it fell as low as 1.246%, a record, according to TradeWeb. Falling bond yields signal that investors are worried that economic growth could be heading for a slowdown.

Another indicator of potential economic strife: When the 10-year Treasury yield slides below that of the 3-month Treasury bill. That inversion in the yield curve, which deepened this week, is seen as a warning sign for investors because it has preceded the last seven recessions.

Other market indicators also echoed the jittery state of markets this week. The VIX, a measure of fear in the stock market, soared 46.6% to 25.03 Monday, its biggest increase in two years. The volatility index climbed to 39.16 Thursday, the highest reading since August 2015.

The shift to less risky assets has pumped up utilities and real estate stocks, which are considered bond proxies because they pay high dividends. As of Thursday, they were down the least out of the 11 sectors in S&P 500.

"If there's one enemy in the market it's uncertainty," said Quincy Krosby, chief market strategist at Prudential Financial. “It's very difficult to model the effect of this on corporate earnings, on revenue growth, on economic growth and on how companies are going to manage if this spreads.”

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