Over the weekend, news broke that we could be facing a coronavirus pandemic. As we all know, the markets hate uncertainty – so what does that mean for us traders?
Hold onto your seats, because it’s going to be a very bumpy ride. Markets are already reacting to the World Health Organization’s pandemic warning. As of this writing, the Dow plunged 800 points on the open this morning. Global markets and bond yields are also down, while gold – the safety net for the investing world – is up.
How will a coronavirus pandemic affect the markets?
When the markets are nervous, you know exactly what happens: selling, selling and more selling. Is this the end of the bull market? I’m not so sure. Evidence (in the form of technical and sentiment indicators) point to a modest pullback. After all, the markets did reach some absurdly overbought conditions.
The fundamental picture is also being scrutinized. If business continues to slow – or if the economy grinds to a halt – in China for an extended period, it will absolutely impact the global economy. I don’t even want to think about the impact. The entire world is completely intertwined, so when a disruption occurs, there is no easy way out.
But back to the markets for a moment. There are a million reasons to sell, and any one of them is valid. Did a company’s valuation drop? Is this the time of year when you like to sell? Is the coronavirus freaking you out? Are you worried about this year’s presidential election? Do you want to cash in on your gains? All are legitimate reasons to sell.
Just keep in mind that the long term trend of SPX 500 monthly chart remains bullish. Price action – the king of the indicators – is strong. A modest pullback this week and into March may not be enough to shake the trend. And by the way, we’ve been here before, and the world did not collapse.
