Trading was halted right after the Monday's opening bell on U.S. stock exchanges as the S&P fell 7%, triggering the automatic circuit breaker stoppage that was put in place after an earlier "Black Monday," in 1987 and updated after the 2008-2009 financial crisis.
"Markets hate uncertainty and there is a ton of it currently in play," said Greg McBride, CFA, chief financial analyst at Bankrate.
The Dow Jones Industrial Average fell 2,013 points Monday, closing down 7.79% at 23,851.02. The S&P 500 closed down about 226 points (7.6%) at 2,746.56. It was the worst day for the market since December 2008.
“It will be messy because we’ve basically lost all our anchors,” economist Mohamed El-Erian said on the CNBC. “We lost the economic anchor with the coronavirus. We’ve lost the policy anchor with people losing confidence in the Fed’s ability to turn things around."
Level 1 Trading Curb
Monday's drop triggered a 15-minute halt in trading, the first level of automatic trading interruption under the current trading curb system that was most recently updated in 2013. Monday's stoppage was the first time an automatic circuit breaker halt has been triggered under the 2013 rules.
Those rules, automatically stop trading when certain big market decreases happen, a measure meant to pause trading to prevent a panic-driven crash. When the S&P 500 drops 7%, a 15-minute Level 1 halt is triggered. Trading also would halt for 15 minutes if the market drop reaches 13%, a Level 2 circuit breaker.
If the market were to continue to drop and reach a 20% decline, a Level 3 circuit breaker would kick in, and trading on NYSE group exchanges would halt for the day.
NYSE: System Worked As Intended
"The market circuit breakers are designed to slow trading down for a few minutes, give investors the ability to understand what’s happening in the market, consume the information and make decisions based on market conditions," New York Stock Exchange President Stacey Cunningham told CNBC. "This is operating as it’s supposed to."
Monday's drop, on a combination of uncertainty surrounding coronavirus, dropping oil prices and the overall economic situation, was being called a nightmare on Wall Street. El-Erian said investors lost the market anchor typically provided by OPEC as a Saudi Arabia-Russia oil price war sent crude prices down sharply.
The circuit breakers give traders a chance to assess more calmly what's happening - something important for most investors.
"The guidance for long-term investors remains intact – do not panic," said McBride. "As the uncertainty persists, the market frenzy will continue, perhaps for weeks, perhaps for months. But long-term investors must think in terms of years or decades....Markets fall sharply, but can also rebound quickly."
Original Black Monday Led To System
The drop that led officials to put the circuit breaker system in place was on Oct. 19, 1987, the original "Black Monday," when the Dow and broader S&P both lost more than 20% of their values, the largest one-day percentage drops for both. The Nasdaq Composite Index dropped more than 11% that day, its biggest decline.
Those circuit breaker rules were used for the first time a decade later, when the Dow dropped just over 7% in October of 1997. On that day, trading was halted twice because of the drop for the first time in history.
That day's losses ended up being far from the worst in history - not even in the top 10. After the 1987 crash, the second-largest single day percentage drop for the S&P was the 12.3% drop in October of 1929 that precipitated the Great Depression.
Don't Look At Monday's Price Action And Make A Decision
Investors shouldn't make the mistake of looking at Monday's price action and making a decision, Credit Suisse Chief U.S. Equity Strategist Jonathan Golub said on CNBC.
Investors should take a step back and look at the current plunge through two different perspectives, Golub said. Investors should consider the damage to corporate profits not in terms of days or weeks, rather for the full year.
Golub said he entered 2020 assuming S&P 500 companies would show a 6% ESP growth, but current revisions now call for flat growth. Zero growth isn't characteristic of what one would expect during a recession and the damage in terms of profit is a first-half 2020 event.
Jayson Derrick contributed to this report.
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