By Gunjan Banerji and Caitlin Ostroff
Investors dumped stocks and flocked to traditionally safer assets like gold and government bonds this week as worries grew that the coronavirus epidemic would crimp global growth.
The S&P 500 index fell 1.2% Friday, while the Dow Jones Industrial Average lost 273 points, or about 0.9%. The tech-heavy Nasdaq Composite slipped about 2%. All three indexes are still within 3% of their records.
Stock investors have been ebullient in recent weeks, driving major indexes to record after record, while bond investors appear to be exercising more caution, scooping up traditionally safe assets and sending yields down to record levels.
The mixed signals in markets highlight investors' struggle to assess the damage that the coronavirus epidemic will have on economic growth around the world as the sickness disrupts consumer spending, manufacturing and supply chains around the world.
Fears that the domestic economy would tip into a recession had ebbed earlier this year as the U.S. and China appeared to reach a trade truce. Since then, lackluster economic data and the virus have clouded the outlook for global growth, sending investors into assets they think will perform well in times of uncertainty.
The drop in bond yields reveals fears about an economic slowdown. Still investors, have kept piling into stocks a sign that many don't think a recession is imminent.
The ongoing disconnect between the two markets was on stark display this week. The S&P 500 and tech-heavy Nasdaq Composite jumped to a record on Wednesday, just two days before the yield on the 10-year Treasury note dropped to a record intraday low as bond prices rallied. Meanwhile, prices of another haven asset, gold, sprung to a seven-year high.
"The bond market was clearly the expression of the fear," said Alicia Levine, chief strategist at BNY Mellon Investment Management. "People are piling into fixed income because of the concerns out there."
The concurrent gains in precious metals and government bonds this year underscore the jitters that have rattled markets. Typically, investors ditch haven assets like gold and government bonds as stocks crest to fresh highs. This year, they have bought risky and safe assets alike as they have navigated a murky economic outlook.
"It's absolutely unusual from a longer-term historical perspective," said Katrina Lamb, head of investment strategy and research at MV Financial. "There's a concern in terms of wondering if we may be heading into a stretch of trouble after this very long, gentle, benign rally."
Despite Friday's declines, the stock market has largely remained resilient in 2020 -- powered higher by shares of technology heavyweights -- even as traditionally safer bets have soared alongside stocks.
Shares of tech companies have outperformed the S&P 500 this year, rising 7.8% versus a 3.2% increase for the broad index. It's a sign that investors are for hungry for companies they view as having a high potential for profits.
"People are desperately looking for organic growth,"said Dev Kantesaria, founder of Valley Forge Capital Management. "High growth stocks should prosper."
Investors had cheered earnings and wagered that the coronavirus epidemic won't have a far-reaching affect on the economy, sending stocks to highs in recent weeks.
Some cracks in that theory started to emerge this week. Apple on Monday became the first major U.S. company to say that it won't meet its revenue projections for the current quarter because of the coronavirus, as the epidemic limited iPhone production and crimped demand for its products in China. Procter & Gamble warned Thursday that the virus will have a material impact on its sales and earnings for the current quarter, hampering store traffic in China and stoking disruptions to its supply chain.
"It can really slow down many areas of the economy," said Mr. Kantesaria, of the virus.
More than 75,000 people have been diagnosed with coronavirus, and over 2,000 have died globally. South Korea reported its first fatality, while two patients in Iran also died and confirmed cases began to climb in Beijing.
Lackluster economic data has added to these concerns. IHS Markit's flash reading for an economic indicator measuring manufacturing and services business activity fell to its lowest level in more than six years. Additionally, new data showed that sales of previously owned U.S. homes sputtered in January. Existing home sales decreased 1.3% in January from December.
The manufacturing data drove the yield on the 10-year Treasury note to 1.461% in early trading Friday, from 1.524% Thursday as bond prices rose. The yield on the 30-year Treasury note fell a record intraday low before paring some of its declines. Gold prices rose about 1.4%, continuing a rally that has sent the precious metal to seven-year peaks.
Some investors said that the Federal Reserve's three interest rate cuts boosted both stocks and government bonds. Additionally, as government bond yields fall, some may be enticed by the higher returns that riskier assets like stocks can offer.
Fed governor Lael Brainard, a top central bank official, said in a speech that interest rates will need to remain at historically low levels for a lengthy period to return inflation to the Fed's 2% inflation goal.
The anxiety in the bond and precious metals markets could eventually trickle into stocks. Goldman Sachs Group analysts warned that "the risks of a correction are high" in a research note this week, and that stock investors may be too upbeat about corporations' ability to withstand the epidemic.
There have been other oddities in the stock market this year. Just as typically riskier equity investments have rallied alongside so-called haven bets like gold and Treasurys, unlikely corners of the stock market have also moved in tandem.
The two best-performing sectors in the S&P 500 this year have been technology and utilities stocks. Tech stocks tend to rally when investors feel confident taking on riskier investments, while utilities tend to advance when investors grow more uneasy about the economic outlook.
Amrith Ramkumar and Akane Otani contributed to this article.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com and Caitlin Ostroff at email@example.com