Could coronavirus push global stock markets into bear territory?
After coronavirus fears sent US and UK stocks to their worst week since the 2008 financial crisis, some analysts are raising the prospect that equities could fall into bear market territory – a fall of 20 per cent from recent highs.
The US’s S&P 500 index has slumped 13 per cent since it hit a record high on 19 February. In trader-speak this marks a correction – a fall of 10 per cent since recent highs.
UK stocks were also hammered as investors frantically tried to gauge the economic impact of coronavirus, sending the FTSE 100 deeper into correction territory and wiping £200bn off the blue-chip index in a week.
Coronavirus has now spread to 54 countries. Last week it moved fast through Europe and claimed its first life in the US. Investors are increasingly fearful of the effect containment efforts will have on the global economy.
The virus originated in China in December. There have been over 85,000 cases and more than 2,500 deaths, the vast majority in China.
Policymakers have scrambled to deal with the virus and the fears that are shaking stock markets.
US President Donald Trump last week exhorted investors to “buy the dip”. But with the virus spreading fast and economic indicators gloomy – an index of Chinese factories hit a record low at the weekend – stock markets could have further to fall.
Russ Mould, investment director at broker AJ Bell, said the FTSE 100 falling into bear territory is a distinct possibility. “Mathematically, we’re not a million miles away,” he said. “You can rule nothing out.”
“A lot of that will depend on the duration and geographic breadth of the viral outbreak and whether the number of cases continues to increase.”
Lori Calvasina, head of US equity strategy at RBC Capital Markets, said the US’s S&P 500 “index could fall to the 2,700–2,900 [points] range for a total drop of 14 to 20 per cent, consistent with the growth scares of 2010, 2011, 2015–16, and the second half of 2018”.
A white knight might yet arrive in the form of US Federal Reserve chairman Jay Powell, who last week said the central bank will “act as appropriate” to help the economy.
Following his intervention, markets think there is a 95 per cent chance of a rate cut at the next meeting, according to CME Group’s Fedwatch tool.
Yet Seema Shah, chief strategist at Principal Global Investors, said: “Monetary policy will have limited impact on this market correction.”
“No matter how much the Fed cuts rates and stimulates consumer demand, it cannot eradicate the need for quarantine and travel barriers to arrest the spread of infection.”
“Markets may not have yet found their floor despite having hit correction territory,” Shah warned.
A full-throated response from national governments could go some way to quelling market fears.
UK health secretary Matt Hancock today said quarantining entire UK cities to deal with coronavirus has not been ruled out by the government.