Few were safe from the downturn that enveloped Wall Street, which was the worst week on the stock market since the 2008 financial crisis. It will go down as the fastest market correction in history, with the S&P 500 (NYSEARCA: VOO) taking only six days to drop 10% from its all-time highs. That wasn’t the only unwelcome record set last week. On Thursday, the Dow Jones Industrial Average (INDEXDJX: DJI) fell 1,190 points, its largest one-day point loss ever, although it’s important to note the percentage loss is the much more pertinent figure to track.
If losses continue to pile up this week, we could be on track to end the longest bull market in history and enter into a bear market.
Read more from MyWallSt:
The catalyst for the sell-off is the potential long-term effects brought on by the novel coronavirus Covid-19, which originally emanated from Wuhan province in China. Many experts warn of the impact the virus may have on the global economy as it spreads from country to country. The U.S. has experienced its first deaths from the virus in Washington state over the weekend, while the first New York case was announced yesterday.
The threat of a global pandemic is enough to scare off many investors into safer havens, with companies reliant on Chinese manufacturing perhaps at the most long-term risk. Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) both came out with a statement revising their earnings forecast for the year due to slowdowns in their Chinese factories, while Tesla (NASDAQ: TSLA) also saw a sharp dip in its share price, which had been on a roll in 2020 thanks in no small part to the success of its Shanghai Gigafactory. The disruption in production for these three companies, which all saw high growth in the past few months, could hamper earnings and production figures long after the coronavirus has subsided.
Was the virus an excuse for a sell-off?
The severity of last week’s sell-off was, as already mentioned, record-breaking. Does the coronavirus present a commensurate threat to the global economy, or was a correction long overdue?
I wrote an article last month ruminating on when the next recession will be, in which I discussed the illogical nature of the stock market. Valuations were soaring while earnings stagnated, meaning the stock market became detached from the economy, and in certain cases, reality. The rise of meme stocks like Virgin Galactic (NYSE: SPCE), Plug Power (NASDAQ: PLUG), and Lumber Liquidators (NYSE: LL) saw outrageous jumps in valuation based on nothing more than potential and speculation. I would surmise that many investors who recognized this irrational exuberance were waiting for an opportunity to pull back and take profits in what has been an astonishingly lucrative bull run. The coronavirus was just that.
Will we have a bear market on our hands?
The extent of the pullback is very up in the air right now. As the market becomes more reactive to any news on the virus, fear will come to dominate people’s minds as doom and gloom pervade the airwaves, leading to further volatility. We are entering into times of uncertainty in the market place and a 20% dip from the all-time highs set only 10 days ago is a very big possibility.
However, never underestimate the resilience of the market. Dow, Nasdaq (NASDAQ: QQQ), and S&P futures attempted a rally early this morning, all up about 1.5% before falling to minor losses, with Twitter (NYSE: TWTR) making some big moves, up around 5% pre-market at the time of writing. Whether this resilience is mirrored in today’s trading is another question altogether. The one thing we can rely on is that it’s going to be a bumpy ride.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Microsoft, Apple, Tesla, and Virgin Galactic. Read our full disclosure policy here.
Financial Analyst at MyWallSt
Michael's first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.