This article was originally published on ETFTrends.com.
The major stock indices sank lower on Monday, following a gap down in the overnight session, after additional cases of the coronavirus were confirmed over the weekend, including one more in California, heightening concerns over the virus’ impact on the world economy.
There are 2,862 confirmed cases so far in China and the death toll in China has climbed to 81. The World Health Organization’s (WHO) director-general is en route to China to discuss options with government and health officials. In the U.S., there are now 5 known cases.
Stocks were broadly impacted by the news, with the Dow Jones Industrial Average falling over 350 points, led lower by American Express. The 30-stock average was down more than 500 points earlier in the day. The S&P 500 lost a similar 1.2% while the Nasdaq Composite fell 1.5%.
“China is the biggest driver of global growth so this couldn’t have started in a worse place,” said Alec Young, managing director of global markets research at FTSE Russell. “Markets hate uncertainty, and the coronavirus is the ultimate uncertainty in that no one knows how badly it will impact the global economy.”
The market has been overbought for quite some time, however, according to many experts, setting the stage for a precipitous drop due to the right stimulus, which some felt would be the Iran conflict, but may now be the developing coronavirus scare.
“The extreme overbought condition and excessive optimism set up an environment that was ripe for a tactical correction, and the developing Iranian conflict may act as a catalyst for one,” Tony Dwyer, chief market strategist at Canaccord Genuity, said in a note earlier this month. A correction signals a 10% decline from the 52-week high.
Continuing weak data and tepid volatility has also been a driver for a market bubble to be forming. The CBOE Volatility Index (VIX), often used as a gauge for investor complacency or fear popped to around 19 from about 12 recently, marking a steady increase in investor fear, after a period of self-assurance.
“The market had run up a lot on the belief that economic data would improve post the trade war,” said Brent Schutte, chief investment strategist for Northwestern Mutual Wealth Management. “This, to me, could potentially push out the time for that data to improve.”
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