Dow Jones crashed amid coronavirus: causes of the stock market crash and prospects

Mar 12 , 2020

From February 21 to March 12, in slightly less than 3 weeks, the Dow Jones lost more than 20%, plummeting from a historic high of 29551-29219 to 23553. Over the last week of February, the world market lost 5 trillion US dollars in capitalization, the US stock market lost 1.7 trillion dollars. The Financial Times called the first week of panic the worst since the crisis of 2008

For the first time, an impending coronavirus epidemic was discussed in early January 2020, when China began to record a sharp increase in the number of cases. The epidemic partially affected several other countries in Asia, but the US stock markets did not respond to this, and on February 18, the Dow Jones updated its historical maximum to 29,551. Investors considered the epidemic to be local, not dangerous, and one soon to be taken under control.

Expectations for a fast solution to the epidemic were not met. On February 21, Italian authorities reported the first six cases, the next day there were 50. This turned out to be enough for investors to immediately withdraw money from all the world markets for fear of the further spread of the coronavirus. The panic sell-off continued throughout the following week

 

This is the situation as of 12.03.2020.

But things are not so gloomy. China has officially stated that the coronavirus epidemic is fading in the country. The growth rate of the disease for the recent days is 0.023%, the number of new cases of coronavirus on 10.03 was, 74% of the infected have already recovered, 16 temporary hospitals have been closed.

Although the WHO has labeled the coronavirus outbreak a pandemic, the organization admits that the ordinary flu comes around every year making about 40 million - 45 million people get infected; 600,000-650,000 of them die of the flu or its complications. The WHO struggles with new types of viruses every year; however, this doesn’t result in such a dramatic collapse of markets, panic, and quarantines.

In view of the foregoing, there are several questions:

  • Who will benefit from the panic fueled amid the coronavirus? Corporations lose billions, the transport (logistics, tourism) communications are broken, the production volume declines. But, if the death rate from coronavirus is 3.4% (the WHO data), and the death rate from the flu/pneumonia is 7.1% (the US CDC data), the problem might be exaggerated. Although the statistical data can be skillfully manipulated, just compare the coronavirus with the flu or tuberculosis.
  • Is the coronavirus the real reason for the crash of the Dow Jones? May it be so that the pandemic was just a trigger? Could it be the last straw that broke the US stock market bubble that had been extremely boosted before?

The answers to these questions will give a clue on the future of the global stock market, including the Dow Jones Industrial Average.

There are several scenarios of the Dow’s outlook

  • OptimisticIt took China two months to combat the epidemic. The coronavirus is at its height in Europe, and so, the situation will be uncertain over at least a month. During this time, the Dow may lose another 10% or more amid the panic and roll down to the levels of 2018. Taking into account the index’s yield over the past few years, things are not that bad.The WHO officials note that the epidemic in China could have started declining because of warming, as the virus dies at high temperatures. Therefore, the world’s community should start calming down already in May. In the meanwhile, Russia and Saudi Arabia should reach an agreement on oil prices (nobody benefits from the current oil prices), and so, another problem of geopolitical and trade uncertainty will be solved. The US stocks, having reached the bottom by May, should reverse up to move to the all-time highs again, amid the optimism, resumption of trade and economic activities and the rise in business activity. Although the stocks will hardly cover the losses quickly, investors, having entered longs at the lows, will be able to gain 15%-20% on the securities of the Dow alone.
  • PessimisticThe panic amid the coronavirus pandemic, it will fade away, will be remembered long after. Despite the cash infusions by the central banks, the global community won’t quickly restore the previous pace of economic growth. That is why the stock markets will be recovering very slow if they at all will. The situation with the Dow is even more complicated. Analysts say the US stock market is overheated. Based on wave theory, a long-term crisis should now start. The crash could be a local one in late February, there is now starting a downtrend. The downtrend could become stronger amid the US presidential election this autumn. At best, the Dow Jones Industrial Average will roll down deeper and consolidate at the bottom through the end of the year. At worst, the situation of 2008 can repeat.

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