Why Could There Be Another COVID-19 Market Crash?

Since the outbreak of the COVID-19 virus, there have been endless headlines about the stock markets and their losses. The resulting fear has led to some of the worst trading in the history of global markets. The Coronavirus crash started towards the end of February. Within a month, the UK market dropped by 33%, while the US market fell by 35%.

While the stock markets have recently recovered people are naturally still skeptical. Is the worst crash behind us, or should we brace ourselves for the worst? Read on to find out if you should be stressing about the effects of the pandemic on stock markets.

Why the Stock Market Is in Panic Mode

Markets thrive on prediction models to plan and anticipate future stock prices. The pandemic is causing uncertainty as many businesses close their doors to curb the spread of the novel virus. That uncertainty is fuelling panic in the stock market across the globe.

The fear of losing more cash is causing some investors to sell their stocks. While other investors are moving their money to safer investments. Many are still uncertain of stock performances in the future.

It does not help that the Dow Jones Industrial Average, which is an index for measuring market performance had hit a record high recently in the US. Some experts argue that the more recent decline was due to previously overvalued stock. Therefore, the drop was due to the market correcting itself, not necessarily COVID-19. However, the worrisome trend is causing panic.

While the Dow hit a historical high point drop, there have been higher percentage drops in the past. For instance, the 2020 decline was low compared to the Wall Street crash of 1929.

The European stock market is staring at a potential downward spiral since the government cannot agree on the EU rescue package. The leaders are divided on the amount of financial package and if the scheme to help struggling business should be loans or grants. The lingering division is weighing down on the markets, as the Northern European economies want loans while the southern members are keen on grants.

What Markets Have Been Hit Hard?

Most stocks have experienced a drop, but the oil markets plunged. With most cities under lockdown, travelling and deliveries are reduced, affecting the oil prices. Besides, some countries have halted factory operations and manufacturing, which means the global markets are recording the worst oil demand since the Great Recession. Global aviation will take the best part of 2020 to recover since travel bans are in effect in most countries.

Smaller companies are bracing themselves for difficult times since their financial resources are dwindling fast. Besides, the investors are cautious of their investments, and the small businesses tend to be a high risk.

Irrespective of the drop in the economy, some low volatility stocks are doing well despite the COVID-19 crash. Current quality stocks comprise of stable businesses with low debts and defensive characteristics like a loyal customer base and that are still open for business or will be in the imminent future.

Recession Vs Depression

A recession is a period of an economic slowdown that could last for six months or more. Often, when a country records a decline in GDP for two straight quarters, it is a sign of recession. With COVID-19 spreading at alarming rates in the US and Europe, a recession is inevitable. The series of disruptions and dislocations in markets will trigger contraction in the global economy. However, a recession is familiar territory and could only last a year.

Stock markets often crash due to significant unexpected disasters. Since no two crashes are similar, it is often difficult to predict when the next recession will occur. Looking into the previous crashes, the Black October in 1987 lasted only three months, but the investors lost almost a third of their cash. The 2008 global financial crisis caused a market drop of 49%, and it dragged on for 16 months. However, the dot-com recession led to 45% losses in investments while lasting for 33 months.

Another significant crash in the UK stock market is the 1973/74 oil crisis, which lasted for two years. The UK markets saw a decline of 73%. When one compares the COVID-19 crash with the previous recessions, it looks mild. For instance, the UK shares are performing better in comparison to the 2008 recession. If it does not escalate, it could be the shortest crash in history. However, it is premature to think the worst is behind us.

The Coronavirus crash is threatening to cause a depression if the policymakers do not act fast enough to save the financial markets from a total meltdown. Depression is a severe downturn in the economy that lasts several years. In the 1929 Great Depression, the world trade dropped by 65%. Unemployment rates were alarmingly high as many businesses shut down, and banks collapsed. The world economy took almost a decade to recover.

From previous crashes, you can see that the road to market recovery is similar. Understanding the aspects of recovery is vital in positioning your investments carefully for profits. In the 2008 recession, stocks that plummeted did better in subsequent recovery and vice versa. In the COVID-19 crisis, quality and growth stocks are doing well, but the value stocks are yet to recover.

Recovery Illusion

April has witnessed a positive change in the stock markets, but it could be the start of a bigger market crash. Central banks and governments are pumping lots of cash into the economy to stimulate a recovery. With the fast cash propping up stocks that have done well in the past, a new decline is yet to materialise.

In a regular stock market, the share prices rely on market demand and consumer expenditure. However, with the current lockdowns, restricted movements, and low buying power, it is unlikely that the influx of cash will make a difference to the market.

If the economies are in recovery, then the next few months should have better performance of high-volatility stocks, smaller companies, high-yield, and value stocks. However, if the markets are yet to sink further, then low-volatility stocks and large companies will continue to thrive.

It seems we will have a two-phase recovery, with the first being fuelled by governments providing easy cash to prevent depression. However, at the end of this phase, the markets may decline further. The second phase will happen when consumer spending and confidence increases. It will only occur when the social distancing restrictions reduce.

How the Stock Market Crash Is Affecting Savings and Retirement

People with pensions and retirement savings should not overly worry about their funds. Most retirement schemes/funds are usually invested in stock markets because they are the safest bet over the long term to meet objectives.

The upside for well managed retirement plans is that they are diversified, which means the money is spread over various bonds, property and stocks. Since retirement funds can weather the losses, it is unwise to take out any money now. Even if the market declines further, there is still plenty of time for those with retirement investments to recoup the losses.

It is uncertain whether the market will keep declining or rising, but people can take advantage of the dip and buy when the prices are low.

One thing is certain, good advice and ability to discuss circumstances and outcomes with someone you trust is a must.

Blog published by Mike Coady