Market Update: Dow Drops Over 1,000 Points

Yesterday, the Dow Jones Industrial Average (DJIA) closed down 1,031 points, its largest drop since February 2018. This drop, which erased all of the Dow's 2020 gains, can be attributed to a few factors:

• Heavy overnight losses in Europe and Asia

• Bernie Sanders' strong win in Nevada, which established him as the front-runner for the Democratic nomination

• Outbreaks of novel coronavirus (COVID-19) in Iran, Italy, and South Korea

It's the last story that is dominating headlines. While Coronavirus is not considered a particularly lethal pandemic, its spread across international borders has grim implications for global trade. If confining the outbreak requires closing international borders or restricting the flow of goods, global trade will necessarily slow down.

• Read our previous article about how viral outbreaks affect markets here.

• Read the WHO's most recent situation reports here.

Dow, Oil, and S&P/TSX All Dive

Since the Dow and the price of oil are both strongly correlated with levels of economic activity, a nosedive following news of a viral outbreak spreading from the world's second largest country makes sense intuitively. Here's how the Dow has performed in the past year:

Source: Bloomberg, February 24th

It's important to note that yesterday's loss is coming off the Dow's highest level ever. Flying this high, any spot of turbulence is amplified.

Here's oil's performance over the last year:

Source: Bloomberg, February 24th

After starting to recover from the initial shock of COVID-19, WTI fell again yesterday from $53USD to just over $50USD.

What's less intuitive is the S&P/TSX Composite showing a similar drop:

Source: Bloomberg, February 24th

As we noted in our previous article, the SARS outbreak did not notably affect the S&P/TSX Composite.

Our Conclusions

It is clear that COVID-19 has surpassed SARS in both scale and market impact. However, we do not yet believe that yesterday's sell-off is the start of a recession or market crash. Our estimation is that investors are looking to decrease their risk and take their profits in the face of some emerging risks. A US Presidential election between a candidate that has proposed a tax on Wall Street and an incumbent who has considered tax incentives for buying stocks introduces risk. A viral outbreak that's expanding in scope beyond the control of the Chinese government introduces risk. Are these circumstances cause for concern? Absolutely. Are they cause for alarm, or panic? Not at all.

Disclaimer: Canaccord Genuity Corp. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). The comments and opinions expressed in this commentary are solely the work of the Cash Management Group and Andrew Johns.