- US stock markets have closed with gains for two consecutive days for the first time since February. However, the Dow Jones Index and the S&P 500 are still in the bear market territory.
- Incidentally, Chinese equity markets have outperformed the US and most other equity markets this year. That might sound strange since the coronavirus originated in China. However, there are multiple reasons why the US stock market crash is far worse than China’s.
US stock market crash
The Dow Jones Index has crashed this year. Equity markets have closed in the green for two consecutive days. On Tuesday, they had the biggest percentage gain since the 1930s. However, they’re in the bear market territory. The Dow Jones Index (NYSEARCA:DIA) and the S&P 500 (NYSEARCA:SPY) have fallen 25.7% and 23.4% this year based on Wednesday’s closing prices. Meanwhile, Chinese stock markets have outperformed US stock markets this year. The Shanghai Composite Index has fallen 8.8% during this period.
Shanghai Index versus the Dow Jones Index
Even the maximum drawdown from the 2020 peaks is much lower for the Shanghai Index compared to the US stock markets. Earlier this year, I noted that the Shanghai Index might outperform the Dow Jones Index in 2020 amid the revival in the Chinese economy. However, the coronavirus has been a black swan event. Surprisingly, China has outperformed global markets this year. Let’s look at some of the possible reasons.
China contained coronavirus
The most obvious answer for the outperformance of Chinese equity markets could be that the country controlled the virus spread much better than some of the developed economies. Unlike democracies, China can take very harsh measures like forced lockdown. While China was slow to admit the coronavirus threat, it ultimately managed to control the virus. However, that’s not the only reason why US stock markets have crashed much more than the Chinese stock markets.
US stock market valuations before the crash
The Shanghai Composite Index was negative for the last decade. Over that period, the Dow Jones Index and the S&P 500 scaled new highs. The Shanghai Composite Index is way below its 2007 highs. The longest bull market in US stocks led to soaring valuations. At the beginning of 2020, US stock market valuations were at a multiyear high. On the other hand, Chinese stocks were looking attractive after a decade of underperformance.
Also, there’s a possibility that the Chinese government intervened in its stock markets. Previously, the country used its means to arrest the stock market crash. The most recent example was in 2015 when Chinese equity markets crashed amid growing slowdown fears.
Will the stimulus reverse the crash?
The Dow Jones Index has bounced back over the last two trading days due to the expectations of a massive stimulus bill. Europe has come up with a stimulus program. India is also in the process of providing a significant stimulus to lift its economy. There has been a flurry of rate cuts globally. The US Fed has slashed rates to almost zero. However, there hasn’t been any significant fiscal or monetary move from China. While there have been some piecemeal measures, a big stimulus is missing. While the US stimulus bill will help the economy, it’s still too early to say that we’ve seen the worst of the crash.