by Ian Harvey
February 26, 2020
A COVID-19 warning from the Center for Disease Control (CDC) that the spread of the coronavirus outbreak from Europe to the U.S. could be imminent, causing the stock market to continue its meltdown. Once again the “fear factor” has come into play, causing traders and investors to panic sell believing that new outbreaks of COVID-19 will push down global demand.
Therefore, yesterday was again crazy, with the stock market experiencing further major plunges, with the Dow and S&P 500 falling more than 3%. The Dow has shed 6.59% over the last two sessions, with the S&P 500 falling 6.28%. It is the worst 2-day drop for the indices since Feb. 2018 and Aug. 2015, respectively. The Nasdaq’s 2-day drop stands at 6.38%, which is its worst since June 2016.
After Monday’s sell-off, and based on history, it was expected that stocks might rebound; and at the time Dow Jones Industrial Average futures were trading above fair value, as U.S. stocks prepared to gain back some of Monday's monster losses, which had sent the blue-chip index spiraling more than 1,000 points.
Read yesterday's article "Coronavirus and The Stock Market!"
But this was not to be as the major indexes began their spiral downwards after the health warning of the COVID-19 virus affecting the U.S.
The Centers for Disease Control issued a warning against nonessential travel to China and South Korea amidst the spread of COVID-19, and an alert suggesting postponement of nonessential travel to Italy, Japan, and Iran.
"The CDC announcement today suggested that the problem is going to be prolonged," said Tom Smythe, a professor of finance at Florida Gulf Coast University. That's caused investors to shift money from equities into "safe havens" like government bonds.
President Donald Trump was reportedly furious that stocks were plunging, believing that health officials’ warnings have spooked investors. Stocks fell even as National Economic Council Director Larry Kudlow said the coronavirus-triggered selloff has created a buying opportunity for long-term investors. The president has reportedly cautioned aides against forecasting the impact of the virus over fears that stocks could fall further and he reportedly will meet with aides today to discuss the matter.
Since the outbreak first emerged in January, the primary concern among economists and investors has been how a temporary paralysis of the Chinese economy — the world’s second largest — would affect global supply chains. For weeks, U.S. traders and investors have paid little heed to the effect of COVID-19, and as recently as last Wednesday, the S&P 500 was at a record high.
However, since then, growing outbreaks in Europe and elsewhere in Asia — and a warning from health officials about the potential risks to the United States — have raised fears that the virus will threaten the nations that serve as key customers for almost everything the global economy produces.
“When you start to impact Western Europe and when you start to impact the United States, now you’re impacting the global economy way more significantly because you’re impacting these demand markets,” said Yousef Abbasi, global market strategist at INTL FCStone, a financial services and brokerage firm.
While worrying, the shock the stock market has suffered so far isn’t extreme. Still, the slump is already raising expectations that the Federal Reserve could take action to lower interest rates if the sell-off deepens.
In comments on Tuesday, Vice Chairman Richard H. Clarida signaled that the Fed was not yet ready to act, although it is monitoring economic developments related to the virus.
And the other reason for the pull-back might be using the COVID-19 as a catalyst for a long overdue sell-off.
Therefore, the challenge now for traders and investors is to avoid full-out panic, and focus on the long term. The stock market will endure, like so many times before, and the present worries will be just another historical instance.
Join us here at Stock Options Made Easy, and find out our trades moving forward.
YOU NEED TO BE IN TO PROFIT!
An Important Note: That any suggestions for options trade considerations require investors/traders to use their own discretion as to when to enter or exit! As well, it is advisable to do further research and due diligence before executing your trade.
It is sometimes best to exit a trade, if there is already sufficient profit accrued, before an earnings report is presented. GREED can be the undoing of a nice profit!