- The Dow Jones suffered another punishing decline on Thursday.
- U.S. economic growth met estimates, which brought GDP expansion to its lowest level since the Obama administration.
- With the coronavirus death toll mounting, analysts say the stock market may be primed for a healthy correction.
The Dow Jones Industrial Average swayed on Thursday after U.S. economic growth slid to its worst mark of the Trump presidency and the coronavirus death toll continued to mount.
The fallout from the outbreak threatens to smack the stock market off its parabolic trajectory, but one research firm says the pullback couldn’t have come at a better time.
Dow Suffers Another Brutal Setback
The U.S. stock market opened to big losses on Thursday but quickly began grinding higher.
By 9:40 am ET, the Dow had recovered from a triple-digit pullback to report a net loss of 42.19 points or 0.15%. The DJIA last traded at 28,692.26.
The S&P 500 fell 0.27% to 3,264.71, the worst performance among Wall Street’s three primary indices.
Bolstered by a 10% surge in Tesla stock, the Nasdaq edged just 0.06% lower to 9,269.42.
U.S. Economy Slows to Worst Rate Since Obama Presidency
The Dow had been teed up for an even bigger opening-bell drop, but stock futures recovered slightly in response to encouraging economic data, which showed that U.S. GDP had grown 2.1% in the fourth quarter.
That reading was in line with economist expectations, providing welcome stability to a stock market paralyzed by coronavirus-related uncertainty.
Still, full-year economic growth slogged to 2.3%, far below President Trump’s 3% target and the worst pace since the Obama administration.
Trump and his advisors continue to trumpet growth forecasts that far outstrip the consensus. Earlier this month, U.S. Treasury Secretary Steven Mnuchin predicted that the economy would expand by at least 2.5% in 2020, even though he expects the ripples from Boeing’s 737 Max debacle to sap GDP growth by as much as 50 basis points.
Most professional forecasters expect the economy to grow by less than 2%.
Trump’s no stranger to hyperbole, and his administration’s questionable predictions are not at all out of character.
What’s concerning is that stock market valuations imply that Trump’s growth forecasts will be vindicated, even though GDP has undershot his estimates in all three years of his presidency.
Why the Coronavirus Outbreak Panic Could Trigger a Healthy Stock Market Correction
According to research from LPL Financial, investor sentiment has surged to “concerning levels” over the past few months.
Bullishness among individual investors – typically a contrarian indicator – climbed to a 15-month high in January. Fewer investors have been hedging against market declines, and fund managers’ cash balances have dropped to a six-year low.
The S&P 500 is trading well above its 200-day moving average, and LPL says stocks haven’t been this overbought in two years.
All of this means that the Dow and broader stock market are primed for a pullback before investor appetites get really out of hand.
A correction now could be a healthy development for the ongoing bull market:
Sentiment is worth watching, as excessive optimism has doomed market rallies in the past. However, we’re still not seeing alarming excesses, leading us to believe a pullback at this time would most likely be a temporary pause in the bull market.
That’s why, perhaps counterintuitively, the panic over the deadly coronavirus outbreak may ultimately strengthen the Dow’s long-term rally.
The epidemic is forcing investors to reckon with genuine threats to global growth. Wild swings are inevitable, but once the volatility settles down, a once-overheated stock market may find itself priced for sustainable growth.