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All three major US stock indices- Dow, S&P and Nasdaq fell to a most significant one day point decline dropping to more than 4% on coronavirus worries during last week of February 2020. However, all the 3 indices reversed course on March 2, 2020 on the hope of actions by the central banks including Federal Reserve Bank to prevent economic agony from coronavirus. A shortage of warnings from several corporates and analysts dragged the major averages down.
The Dow Jones Industrial Average dipped by 1190.95 points, and S&P 500 dropped to 2978.76 both showing a fall of 4.4% on February 27, 2020. Nasdaq Composite slid to 8566.48 showing a fall of 4.6%.
The Market collapse for February had deepened, as all significant stock indices around had posted significant decline and uncertainty due to the uncertain environment owing to coronavirus.
Following the sharp fall in stock prices, US Treasury yields drop to all-time lows as investors brace to take positions in the safe haven asset.
The bond yields fell amid sharp sell-off in the stock market as several coronavirus cases surged globally striking fears amongst investors of a global economic slowdown.
Weak market scenario all over the world
Amongst overseas markets, European Stoxx 600 Index fell by 3.3%, Hong Kong’s Hang Sang Index fell by 2.4%, and Japan’s Nikkei slid by 3.6% on February 28, 2020 on fears that Olympics planned for July-August 2020 may have to be called off due to coronavirus scare. South Korea’s KOSPI fell 3.3% on the same day following a rapid spike in number of new cases raising coronavirus alert to the highest level
Negative 10-year bond yields are prevalent for Japan, Germany and parts of Europe ( Switzerland, France, etc ) involving trillions of dollars of global sovereign debt. Growing uncertainty has caused lower bond yields as the coronavirus outbreak can result in more unpredictable news.
Several investors are pumping money into safe heaven assets with yields on US treasury notes falling to an all-time low of 1.07% on March 2, 2020.
Factors like subdued economic growth, tepid inflation outlook and not enough safe assets to fall back on have accentuated the decline in yields.
Is the market crash a valuation game with coronavirus being just an explanation of convenience?
Coronavirus is being blamed for the stock market crash. If one looks at the stock market behaviour during previous epidemics of the same intensity, there are numerous examples of a completely different scenario.
As per Dow Jones Market Data, the S&P 500 Index rose by 7.9% based on 6-month performance for the index in May 2003 after the SARS outbreak in November 2002. After 12 months from this point, Markets were up by 15.4%.
Similarly, during the time of Avian flu outbreak – a highly pathogenic H5N1 virus, S&P 500 rose by 2.5% in about six months in the period ending July 3, 2006, after the reports of the flu. The markets rose by 15.4% in the following 12-month percentage change of S&P from July 3, 2006.
Swine flu- 2009 pandemic- H1N1 influenza virus that lasted from early 2009 to late 2010 resulted in a 21% rise in the markets for 12 months period ending May 3, 2010. Similar data can be seen during the time of outbreaks of HIV, pneumonia plague, dengue, Cholera, Zika etc.
During the Spanish flu of 1918 in the US that took about 20-50 million lives, the Dow Jones index rose steadily. Why? US index had slowly corrected right before the outbreak because of the deadly impact of World War 1. In the wake of reasonable market valuations, there was barely any space for market correction further, which was the reason for the markets to go up despite the flu.
Likewise, with the Indian markets even now trading at higher valuations, a market correction is needed to align it with global markets. The fall in the last week of February for the Indian markets was a valuation play rather than coronavirus being the reason.
Coronavirus has pushed the investors to buy gold which already is on course to make attain new highs. This show investors globally are now hesitating to invest in volatile markets.
These factors support the view that the market crash is just a result of a valuation conundrum and coronavirus is being cited just as a convenient explanation which suits market participants. Is This the case?
The intensity of the outbreak will influence the markets. Just because such outbreaks didn’t manage to affect the markets in the past doesn’t necessarily mean this will also be the case this time around.
Therefore, any fixed conclusion cannot be drawn from the effect of epidemics on markets and economies.
Interest rate cuts on the charts by Central banks
With more and more investors buying bonds and as inflation expectations dip, bond price will continue to increase, and the yields will fall. Further to this, there is an increased risk of negative yields. Low yields are adding to the fears of the US Fed which is already worried on the inflation front.
Expectations of interest rate cuts by the Federal Reserve seems high on the cards in the money markets. Proposals of targeted tax cuts and other emergency actions could be taken to deter further damage to the economy. As per Federal Reserve chief Jerome Powell’s statement on February 28, 2020, he said the Fed might introduce rate cuts to blunt coronavirus impact on US economy. Several other countries are also expected to cut interest rates to stem the anticipated problems from the virus outbreak.
Will things get better?
It is generally observed that valuations are not yet depressed enough and uncertainty of the impact coronavirus on the global growth remains high in the near term. Central Bank officials across the globe opine that there does not yet exist a tool or a method to nullify the economic effects of the coronavirus. However, as per the forecast by Oxford economists, the US economy is expected to be impacted if coronavirus is declared as a pandemic by the World Health Organisation.
However, disruptions to China and its factory output could be significant as its share of World GDP has risen to 19.3% in 2019 as per IMF. The most direct influence of coronavirus is on the sentiments of people. But the economic effects are what investors are grappling with.
