How the stock market crashed in 2020
Covid-19 has disrupted the global economy from South Africa to the Far East, confining millions of people to their homes and causing businesses to go bankrupt. The global financial stock market crash of March 2020 was spectacular, but it was only partly linked to the pandemic scare. According to Forex broker experts from FXTM, it had been slowly building up for a while.
Not only Covid-19 to blame
The disease was declared a pandemic on March 11. However, the Dow Jones Industrial Average (DJIA) had already started moving down a few weeks prior. Due to trade wars between the US and China, investors were already stressed. On February 27, the index had lost over 10 per cent in comparison with its record peak two weeks before.
Thus, the broker sees two major drivers of the collapse. On its own, Covid-19 was greatly feared due to the mortality rate, which looks high in comparison with the seasonal flu.
Chronology of the crash
Just a few weeks before the crisis hit, things were looking hopeful. On February 12, a record high was achieved, with the index reaching 29,551.42. However, this was when a downward trend commenced. From February 12 to March 9, DJIA lost 5,700.40 points or 19.3 per cent. Had it been 0.7 per cent more, this would have signaled the coming of a bear market. However, this did happen two days later when the shocking 20.3 per cent fall (relative to February 12) occurred.
Overall, the event included three key drops for the DJIA. The deepest plunge in history occurred on March 9. It was followed by further record point losses on March 12 and March 16. Here is how the disaster unfolded. It all began on March 9 with DJIA losing 7.79 per cent and dropping by 2,013.76 points - to 23,851.02. However, this was only the beginning. Even though the index had its most dramatic point drop over a single day, the worst was yet to come.
On March 12, DJIA reached a record 9.9 per ceny low, falling by 2,352.60 points to 21,200.62. This qualified as the sixth-worst percentage decline ever. Yet, it paled in comparison with Black Monday on March 16. This was when the ultimate record was set. Dow tumbled all the way to 20,188.52, losing 2,997.10 points, or 12.93 per cent.
Was March 16 the worst Black Monday?
How does the current fall compare to similar events in the past? If you examine the Dow Jones history, you will see only two examples of deeper plunging. This happened on Black Monday on October 19, 1987, when the index experienced a devastating 22.61 per cent loss. On December 12, 1914, the market saw a dramatic fall of 23.52 per cent.
The previous Black Monday on October 28, 1929, saw just a 12.82 per cent decline, which is 0.11 per cent less than the figure on March 16, 2020. However, it was part of the dramatic crash that brought on the Great Depression.
Is a recession inevitable?
Unfortunately, the future does not look bright. We are now looking at double trouble: a stock market crash combined with an inverted yield curve. The latter is an unhealthy situation when the return on a short-term Treasury bill surpasses that for the Treasury 10-year note.
This shows that short-term risk is viewed as greater than the long-term one. Investors tell the world that the negative effects of coronavirus cause them to demand higher yield within a month, than for the 10-year note. Overall, we have a harbinger of recession.
In the current condition, economic growth is stifled, while consumers are stuck in their homes. The only upside is the experience gained from market crashes of the past. The survival strategies remain unchanged. These have proven their efficiency throughout history.
How it affects you
So, what does this all mean for ordinary consumers and traders across the world? It is obvious that investment in the stock market has diminished in value. You may feel the urge to sell off your assets, but this would be a rash and emotionally motivated decision. It is not easy to know when the next favourable moment to re-enter will come.
The typical duration of the bear market phase is 22 months, but there are exceptions. Any online trading expert will recommend waiting. Otherwise, long-term losses could be significant.
With enough cash, you can also buy stocks while they are cheap. Remember that the current market downtrend is only temporary. Consumers should aim to have three to six months of living expenses available. Therefore, adding to your savings makes sense.
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