Worrisome news about the spread of the coronavirus has roiled world financial markets in recent weeks, but it's not the only factor behind the markets' wild gyrations, experts say.
Investor psychology, rich stock valuations and companies' financial leverage are all fueling the recent huge swings, they say.
In the last two weeks, the Dow Jones Industrial Average has tumbled more than 780 points on five days, and had rallies of more than 1,100 points on two. That does not include Friday, when the 30-stock index was down about 250 points at the close. The S&P 500 and other major averages have followed suit.
"The markets have been way overpriced for a number of years and were going to, at some point, crack," Martin Melkonian, a Hofstra University economics professor, said Friday.
He said companies were buoyed by the 2018 Tax Cuts and Jobs Act, which cut the corporate tax rate, and Federal Reserve policies that are "pumping new money into the system."
In October, the International Monetary Fund issued a report warning that U.S. companies were courting financial risk by making record payouts in the form of shareholder dividends and share buybacks.
U.S. companies could have poured funds into "real assets" like factories, Melkonian said, but instead chose to plow the money into dividends and share buybacks, adding to risk.
Investor emotion is playing a major role in market swings as well, said Fred Sloan, an investment adviser at the Lake Success office of Captrust, a Raleigh, North Carolina, advisory firm with more than $300 billion in assets.
"There's an emotional panic going on relating to the coronavirus," he said. "The fear investors have is that it's going to hasten the next recession. As investor psychology goes back and forth, there are big swings."
The new coronavirus was first identified in December in Wuhan, China, and has spread worldwide.
Expectations of economic disruptions have slammed energy, airline and cruise ship stocks.
A research report issued Friday by Wedbush Securities Inc. technology analyst Daniel Ives acknowledged that the coronavirus is disrupting supply chains, introducing uncertainty around consumer and business demand and adding risk to lofty tech stock valuations.
Ives, however, said that it would be folly to "hide under the covers" or watch "red screens with frozen fear."
He pointed to long-term technology trends like cloud computing, 5G mobile devices and cyber security as growth areas likely to carry tech companies through "Armageddon-like fears."
As the coronavirus outbreak unfolds around the world, Melkonian said international businesses will face a landmark "moment of deglobalization." That's when companies, after decades of building supply chains stretching around the world, will, at least for a time, be unable to get parts, packaging or finished products from overseas.
The election year adds yet another layer of investor emotion and potential market volatility.
On Wednesday, the Dow Jones Industrial Average jumped about 1,200 points after former Vice President Joe Biden's strong showing in the Super Tuesday primaries. Many pundits interpreted the rally as an indication of investor relief that Vermont Senator Bernie Sanders, a self-described democratic socialist, had been usurped as the front-runner.
Marilyn Stefans, owner of Woodbury-based Wealth Advisory Associates, said fear can trip up individual investors.
"When people get scared, they withdraw their money," she said. "They're not there when the market recovers. What they've done is they've locked in their losses. People should not act emotionally, they should act financially."