How China Coronavirus Fears Impact The S&P 500 Index


Stock prices fell yesterday as the death toll and the number of people infected with a new coronavirus continue to climb. How has the virus that originated in Wuhan, China impacted the S&P 500 index?

28 January, 2020 | HYCM – When the S&P 500 registers a day where it loses more than 1% of its value that is a significant event.

Why a 1% down day is key for the S&P 500

In the current market sentiment, the S&P 500 has not recorded a single day of loss greater than 1% since October 2019. A 1% loss day breaks that run. Yesterday the S&P 500 closed down -1.57% at 3243. Why is that significant?

Well, historically speaking, when that happens there is a much greater chance of the S&P 500 trading sideways or lower for the next 30 days. In the present situation, that makes considerable sense considering the coronavirus concern. Look at the table below. It shows how a 1% down day was met by a falling or sideways market in the next 30 days.

What will make global equity concerns to grow?

The following 2 factors will make global equity concerns to grow:

  1. A spread of the virus outside of the Hubei Province. The Hubei province, in which the city of Wuhan is in lockdown, contributes less than 5% to China’s total GDP. So, in order for global equity concerns to grow the market will need to see the coronavirus spread further within China.
  2. A declaration by the World Health Organisation that the coronavirus is a ‘global health’ concern. This will indicate the potential for a greater spread of the virus.

Expect the S&P 500 to fall or trade sideways

If we see either, or both of these events occur, then expect further equity sellers, JPY and CHF buyers as well as gold buyers. Also, we could expect the S&P 500 to fall or trade sideways in the next 30 trading days. However, the true seriousness of the coronavirus has not yet been fully established. Yes, the virus is very contagious. Yes, sadly over 100 people have died.

However, many more die of the flu each year. Therefore, if the market views the coronavirus as a containable virus, then, the S&P 500 will recover quickly. Look at the response of the S&P 500 after the last virus of SARS in 2003. Notice that the S&P500 recovered much more quickly than the MSCI Asia Pacific Index. This, of course, makes sense, as many more SARS cases were in the Asia Pacific region.

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