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US Stock Market Indices React to Uncertainty Caused by Coronavirus

The coronavirus outbreak has had significant implications for economies throughout the world in the opening months of 2020, yet the major US stock market indices have soared to record highs during this period.

This scare has provided a microcosm of how some of the world’s major economies can go one way, but Wall Street indices go the other. While the Chinese economy has faltered, the Nasdaq, Dow Jones, and S&P 500 have largely been in robust health.

At the close of play on 19 February, the Nasdaq and S&P 500 finished at record highs. The S&P 500 rose by 0.5% to secure a new all-time high of 3,386.15, while the Nasdaq soared by 0.9% to reach 9,817.18. The Dow Jones increased by a comparatively sluggish 0.4%, with this index still recovering from Apple’s suggestions that the coronavirus outbreak would reduce both production and demand of the tech giant’s products.

From strength to strength

Nevertheless, the overall strength of these global indices seems at odds with the struggles of the Chinese economy. Peter Boockvar, Chief Investment Officer at Bleakley Advisory Group, has attributed the US stock market indices’ consistent performance to an understanding that the Federal Reserve will save the markets from an economic downturn.

Boockvar can justify that perception with events in September; the New York Fed injected billions of dollars after it was revealed there was a cash deficit in banks and financial institutions, and the S&P 500 has risen by over 12% since. If the Fed saved the Wall Street stock indices from the worst in the past, then the markets are emboldened to assume that the same would happen again.

That is not a sustainable approach in the longer term, as there will come a time where even the Fed is unable to save the day. However, it may fuel the markets with enough optimism to ride out the effects of the coronavirus scare. This is not a luxury that China and its key trading partners can enjoy.

Loss of trade weakening economies

A corollary of the coronavirus scare is the effect on international trade, with China the most significant trading partner for countries across the world. The consequences of the weakening of the Chinese yuan can be seen everywhere from Germany to Nigeria, with the importing and exporting power of these countries greatly diminished.

Those consequences have been felt particularly keenly by one of China’s closest neighbors, Japan. The world’s third-largest economy was already on the precipice of an economic downturn, so the coronavirus outbreak has only exacerbated existing problems.

The Nikkei 225, the key stock market index in Japan, hasn’t shown the resilience of its Wall Street counterparts. In the same week that the US stock market indices were posting record highs, the Nikkei 225 was falling by 0.69% during just one day of trading.

The American bubble

The US stock markets’ traditional resilience against geopolitical developments makes them a popular choice for indices trading, with investors having benefited from the positive market outlook during the past few weeks. Logic would suggest that issues for the second and third-biggest economies in the world should inhibit the performance of the biggest, but stock markets do not operate entirely based on empirical data.

While the inability to trade at a normal rate has tangible effects that can slow the Chinese economy, stock indices are as much about market sentiment as they are logistics. Traders in Wall Street have adopted the optimistic stance that the coronavirus outbreak is now under the control of the Chinese government and that this awful situation will soon be resolved. This is why the Dow Jones, S&P 500, and Nasdaq can all perform encouragingly while national economies falter.

There has been some doom and gloom to supplement the boom of the US stock market indices during the coronavirus outbreak. The Nasdaq failed to match the speed of growth of the S&P 500 and the Dow Jones in the first week of February, as Tesla stocks fell by around 20% following suggestions that the coronavirus would impinge production targets at the company’s Shanghai factory. However, just two weeks later the Nasdaq was posting record highs, demonstrating the stock index’s capability to bounce back.

That is a testament to the power of market sentiment; even bad news coming out of giants like Apple and Tesla hasn’t been enough to quash the optimism on Wall Street. With positive noises coming out of Beijing in the fight against the coronavirus and the Fed waiting as a backup plan, that optimism looks set to continue at the US stock market indices in the coming weeks