Did the Dow Jones Catch the Coronavirus?

  • The Dow Jones Industrial Average Index fell by 3.6% or 1,000 points on Monday. All of the broader market indices, including the S&P 500, the NASDAQ Composite, and the Russell 2000, fell by more than 3.0%. Fears about the coronavirus spreading beyond China led to a sharp fall in the US and global markets.
  • Meanwhile, after the sharp fall on Monday, the Dow Jones Index futures are in the green today. Was the reaction mild or could the coronavirus trigger a stock market crash, which bears predicted last year? Let’s explore.

Dow Jones Index and the coronavirus

US stock markets have mainly been immune to the coronavirus. However, that changed on Monday. The Dow Jones Index fell by more than 1,000 points—its worst intraday fall in two years. So far, the coronavirus epidemic has mainly been in China. There were only a few scattered cases in other parts of the world. However, South Korea reported several cases of the coronavirus. There are concerns that the virus could spread to other countries. Morgan Stanley expects China’s first-quarter GDP growth to fall to 3.5% due to the coronavirus. The IMF expects the Chinese economy to grow 5.6% in 2020—40 basis points below its January forecast. The IMF also expects the coronavirus to shave off ten basis points from global growth this year.

S&P 500

US stock markets have come off their record highs amid the coronavirus threat. However, looking at the year-to-date price action, it’s a sneeze at best. So far, the S&P 500 (NYSEARCA:SPY) and the Dow Jones Industrial Average Index (NYSEARCA:DIA) have fallen by 0.15% and 2.0%. Notably, the US stock market valuations are at the highest level since 2002. Last year, markets priced in a recovery in US and global growth as well as a revival in US corporate earnings in 2020. In contrast, the coronavirus threatens US and global growth.

Do US stock market investors need to worry?

So far, the coronavirus cases have been limited in the US. However, the possibility of coronavirus spreading can’t be ruled out. Last year, US companies had to grapple with the US-China trade war. Trade war fears triggered a sell-off in the Dow Jones Index. While trade war fears have subsided, uncertainty about the coronavirus could hit US companies. There’s uncertainty among US companies that have operations in China.

Warren Buffett on the coronavirus

One approach would be to think like Warren Buffett. He told CNBC, “We’re buying businesses to own for 20 or 30 years. We buy them in whole, we buy them in parts … and we think the 20- and 30-year outlook is not changed by the coronavirus.” That said, even Buffett hasn’t been too comfortable with stock market valuations based on Berkshire Hathaway’s record cash pile. Also, not many retail investors have similar timelines as Buffett.

What to expect from the Dow Jones Index

Stock market investing has always been risky. However, risks need to be evaluated appropriately and priced. Whenever risks tend to be underappreciated and underpriced, it leads to risk build-up in financial markets. The situation is worse if the events occur near high stock market valuations, which we have right now. Did the Dow Jones Index only have a mild reaction to the coronavirus or could the situation get worse? We’ll have to wait and see.