We have had a lot of time to think through the outbreak of coronavirus (Covid-19) and its impact on the global economy and financial markets.
First, it is important to keep in mind that global stocks were ripe for a risk off period after rallying 15 percent from the beginning of the fourth quarter. All we needed was a catalyst.
In the week before the epidemiological alert on the new coronavirus on January 16, trading volume at online and discount brokers exploded and small trader call buying jumped to 46 percent—the highest level since a reading of 47 percent in October 2007, ahead of Dow’s 54 percent slide. As we asked in January, “Could we be seeing a buying climax?” The all-time high in small trader call buying was 52 percent in March 2000 at the height of the dot-com bubble.
The public was fully committed to the bullish uptrend and could easily have been spooked by any negative developments. The VIX index was hovering near its lowest level in two years.
Global stocks and oil prices fell sharply, spurred by the concern that the fast-spreading virus outbreak in China cannot be contained. Indeed, it has already begun to infect people in at least 60 countries, and it will travel further before it’s done. There are growing calls of a “global pandemic.”
Covid-19 has killed at least 2,900 people and infected more than 85,000 globally. As it currently stands, 94 percent of the global cases are within mainland China (and 81 percent in Hubei province). Most cases are not life-threatening, but its greater spread has already led to more deaths than its related coronaviruses. Mortality rates are skewed hea...