The Dow Jones dropped by more than 1,000 points last Monday, closing at 27,960.80 as the coronavirus continued to spread beyond China to other countries, including South Korea, Iran and Italy. In its 124-year history, this is the Dow’s third-largest single-day fall.
Fears that the outbreak could trigger a global recession appear to have taken hold, with talk of a pandemic leading to mass quarantines as well as factory, office, transport and retail shutdowns also sending the S&P 500 down 3.35%, and the NASDAQ down by 3.7%.
There was no let-up in the coronavirus-inspired global market sell-off over the following days, as more nations announced more cases, with the Dow ending the week down 12.8%, the S&P 500 off 9.3% and the NASDAQ down 6.76%. This is the worst performance for all three since 2008, and a rapid correction from recent record highs.
Amount the Dow had dropped by on 28th February
Goldman Sachs added to the bleak picture by forecasting that US firms would see zero earnings growth this year as a result of the outbreak. Indeed, Microsoft [MSFT] and Apple [AAPL] have already warned about their sales outlooks, as have Diageo [DGE] and IAG [IAG].
What will next week bring in the battle to contain coronavirus?
Some analysts expect the market to fall further as investors digest not only more coronavirus cases, but the worst-ever Chinese manufacturing numbers released at the weekend. However, others hope that central bank action in the form of interest rate cuts could bring some much-needed calm.
“Investors have largely been caught off-guard by the serious and far-reaching economic consequences of the coronavirus,” said Nigel Green, founder and chief executive of deVere Group. “Clearly, this will hit global supply chains, economies across the world and ultimately government coffers too. It could push the world to the brink of a recession. Until such time as governments pump liquidity into the markets and coronavirus cases peak, markets will be jittery triggering sell-offs.”
“Investors have largely been caught off-guard by the serious and far-reaching economic consequences of the coronavirus. Clearly, this will hit global supply chains, economies across the world and ultimately government coffers too. It could push the world to the brink of a recession” - founder and chief executive of deVere Group, Nigel Green
However, Rupert Thompson, chief investment officer at wealth manager Kingswood, believes that such halting global growth may only be consigned to the first quarter.
“The outbreak is likely to follow the path of previous such health scares with growth rebounding in the second and third quarters,” he said. “Prior to the outbreak, we had been planning to add to our equity positions if markets see a significant correction. Our inclination is to stick with this game plan although any such move would clearly hinge on the latest developments.”
Analysis of market data shows that the past 10 times the S&P 500 index has fallen by as much as 3%, it went on to experience an average 0.27% decline the following trading session, but made a dramatic comeback in the following week, month and year. On average, following such a dip the index is typically up 1.83% within a week and 12.97% a year later.
The Dow follows a similar pattern, rising 2.07% a week after and up 12.52% a year after, on average.
But how do these models stack up against a global pandemic, the scale of which has not been experienced in most people’s lifetimes?
This is new territory, and JP Morgan believes investors should be proactive. “What tends to happen is that the market bottoms when the cases plateau,” said Gabriela Santos, global market strategist at JPMorgan Asset Management. “Perhaps it’s a buying opportunity, especially in emerging Asia.”
“What tends to happen is that the market bottoms when the cases plateau. Perhaps it’s a buying opportunity, especially in emerging Asia” - Gabriela Santos, global market strategist at JPMorgan Asset Management
Indeed, some analysts have already been highlighting potential beneficiaries, such as Netflix [NFLX] as more people work from home or self-quarantine. Telecommunications firms such as Verizon [VZ] could also see a boost, providing the data needed for increased work and leisure time at home, as well as the medical firms hunting for a vaccine.
Delphine Arrighi, a fund manager at Merian Global Investors UK is much more restrained.
She believes the crisis will “eventually” be a buying opportunity, but time is needed to see how broad and deep the outbreak becomes.
“More medium term, we think the growth recovery story remains unchanged, but we agree with the market re-pricing that temporary setback,” she explained.
Patrick Hennessy, head trader at IPS Strategic Capital also urges investors to wait and see.
“People have been so preconditioned to buy the dip and to always expect the market to recover that people can get smacked around with moves like this,” he said. “No one knows how this thing ends.”
“People have been so preconditioned to buy the dip and to always expect the market to recover that people can get smacked around with moves like this. No one knows how this thing ends” - Patrick Hennessy, head trader at IPS Strategic Capital