S&P 500: snowball effect

S&P 500: snowball effect

2020-02-25 • Updated

Blindfolded

On the H4 chart below, we are looking at the S&P 500. As you can see, there was no change to the usual healthy rising trajectory of this American stock market index, except for the period between 24 January and 3 February – and note how quickly the stock market recovered to get back to its “normal” growth on the last date!

Relativity

The geostrategic position and the economic strength of the US do have their advantages. Let’s compare trade balances of different countries to see how vulnerable they are to the economic crisis in China due to the virus outbreak.

Australia has 24% of its imports from China, while the US – 22%. The figures are almost the same, right? Right. But what’s the importance of those imports to their respective countries, i.e. their relative weight in the entire economy? American imports account for 15% of the GDP, while those in Australia – more than 20%.

Exports – even worse (for Australia): 35% of what it ships to other countries, goes to China, while the US only ships 11% of its goods and services to its partner across the Pacific. In the meantime, the weight of the Australian exports is again more than 20% in its GDP, while the US has only 13% of its GDP in exports.

These figures may be not exact, but the gist in this example is straightforward: the American trade balance tied to China takes a significantly smaller part in the GDP of the US, compared to the same for Australia. That means, whatever harm comes to the national economy through damaged trade with China, for the US it will be smaller, for Australia – bigger.

In other words, the economic splendor of the US nullifies a big chunk of damage that pushes any other country to the brink of a recession or at least a very notable slowdown, with respect to the global factors. Now that’s the economic part of the story, which makes 50% of the confidence of the US stock market.

Simply put, if one was to ask the American stock market “Are you not scared of the virus? See, China is reduced to 50% now!”, the reply would probably be “Well, see how big we are…”.

Two oceans

Another part of the story is geography. South Korea, for example, would have all the reasons to worry about the virus even if it didn’t have infection cases already in its territory. Obviously, that’s because it has a common border with China.

Italy, conversely, would not have as many reasons to worry about it, because it is far away from China. But the virus already infiltrated into its territory, so now it is preoccupied with the disaster as well. Consequently, Coronavirus is now Europe’s problem too.

And the US? Two oceans separate it from the rest of the world. Pacific – from China. Historically, it has been one of the strongest geopolitical factors defending the US at all times against most territorial threats, military or biological. Roughly speaking, most of the dangers for the US have to fly many thousands of miles crossing the Atlantic or the Pacific to become a reason for the Americans to worry.

Hence, as long as there are no flights coming in from China, the Coronavirus does not pose a direct threat to the US. That is another 50% that used to be the backbone of the American stock market’s feeling of security.

Accumulation

But now, it seems that American investors woke up. When S&P 500 crossed 50-MA and 100-MA on its way downwards dropping from – by the way – the recently reached all-time high of 3400, it was still not enough to consider it a problem. It penetrates through 50-MA and dives below 100-MA once in a while, just like it did on 24 January – 3 February. The current position, however, is something different. The level of 3320, the index reached recently, is the same where it was during that dive a month ago. This is way below 200-MA, and that is technically speaking.

Fundamentally speaking, a lot of observers comment on a significant change in the market mood. Compared to something like “Yes, we regret the virus in China, but let’s get back to our normal course” which has been prevailing among the investors until now, current assessments of the economic outlook are becoming grimmer in the US. 

To ignite that, nothing specific happened. Apple’s plunging sales in China or global supply chain disruptions have a low individual impact to be a valid sole reason. More probably, just because the virus has been there long enough, the global economic damage has been accumulating like a snowball. Eventually, it has become something that is impossible to overlook – even from the US.

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