Is a Stock Market Crash Coming in 2020?
As the coronavirus slows economic activity worldwide, the stock markets are potentially moving towards a real stock market crash, which could lead to a financial crisis in 2020.
The main American stock market indices have lost more than 20% of their value since their last peak on March 11. This has created what investors call a bear market, and can potentially discourage many investors while encouraging short sellers.
The stock market indexes of the United States and Europe possibly have further to fall, and measures to block the coronavirus epidemic are expanding, which all carries additional risks to the global economy.
What is a stock market crash?
A stock market crash refers to a sudden and generally unexpected fall in stock market prices, following an event that caused panic in the financial markets.
There is also such a thing as a mini-crash - which is a very rapid fall in prices, generally followed by a rise, which is typically caused by technical problems or human error. These are different from large-scale stock market crashes, which affect all markets and typically which last longer, and are slower to recover.
This article will deal only with large-scale stock market crashes.
Is a new stock market crash coming?
According to several economists, the risk of a stock market crash happening in 2020 is probable, given the current market situation and context. Some analysts go so far as to claim that there could be a stock market crash more serious than the last one in 2008.
The global economy had already started to show signs of weakness in 2019, particularly in Europe. The coronavirus, which spread rapidly in Asia before coming to Europe and the United States, has worsened the situation by exposing vulnerabilities in various sectors of the world economy.
In response, central banks and governments are organising their plans, but the decisions have been slow to come. Decisive restrictions have not quickly enough been accompanied by economic support measures. For example, Donald Trump announced a ban on travel to the United States from Europe, but measures to support the economy are slow to be implemented.
Overall, investor confidence seems to have been severely impacted, and the announcement of economic stimulus measures are barely enough to stabilise the stock markets before they go down again.
A new stock market crash, therefore, seems more and more likely, and potentially could be as serious as that of 2008. This will become more and more likely as the coronavirus spreads in Europe and the United States.
In fact, the stock market indices have experienced one-day drops since 2008. The 20% loss since the last peak is also an element that will weigh on the morale of investors and encourage short sellers.
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What would a stock market crash look like?
If a stock market crash were to happen, it would follow the increasing economic losses from the coronavirus pandemic, while activity dramatically slows in almost all sectors of the economy. Manufacturing would cease in certain regions of the world, quarantines are enacted, and general fear of travel will weigh heavily on the economy, which would be reflected in the financial markets.
In addition to this, oil markets would plummet, as the coronavirus epidemic would impact the demand for crude oil. Tensions between Saudi Arabia and Russia appear to remain high after the failure to reach an agreement to cut oil production.
As a result, Saudi Arabia has pledged to increase production as Russia has done. This tends to worsen the oil shock, as was seen when oil prices fell more than 30% after the announcements.
As international tensions persist alongside the spread of the coronavirus, we can expect continued volatility in the coming days, and conclusive hints towards a new stock market crash in the coming weeks.
At this time, however, nothing about the future of the markets is certain. It is entirely possible for appropriate and successful measures to be implemented, and turn the market around before a full-blown recession, or crash.
What to do in the event of a stock market crash
A stock market crash is the result of panic and fear in the financial markets, characterised by strong risk aversion.
The market mechanisms observed during small, regular phases of risk aversion remain generally the same during stock market crashes. During these phases, investors seek to sell the "risky" assets for the benefit of "safe haven" assets. We are entering risk-off mode.
Typically, investors will sell stock indices and buy bonds and gold. With Admiral Markets, you can trade index, bond and commodity CFDs like gold.
It is by taking advantage of these periods of panic that speculators have the opportunity to earn a lot of money quickly, by closely following this pattern of sales in risky instruments and purchase of safe havens.
On Forex, there are also so-called high-yielding (risky) currencies, and the safe havens. While AUD and NZD (high yield) will generally decline in the risk-off phase, shelters like JPY and CHF will progress. The opposite remains true in the phases of confidence and risk appetite. Note, however, that in Forex, the JPY is the most reactive currency to risk in market sentiment.
How to invest in the stock market during the coronavirus stock market crash
Whether you are a short-term trader or a long-term investor, the volatility of the stock market remains a risk factor, but it also offers a lot of opportunities:
- Long-term investors have a great opportunity to strengthen their equity portfolio at much more attractive prices. After a 10-year market rally, many investors were waiting for a bearish correction to begin buying again. If you don't already own stocks, and want to invest in them for the medium to long term, this is probably the time to do so. The CAC 40 has lost more than 23%, and the Dow Jones more than 18% since February 24. This strategy can be particularly profitable and relatively less risky, while the impact of the coronavirus could last only a few months.
- Short-term traders can also make do, by taking advantage of the volatility in short-term time frames, both up and down. Traders careful to control the leverage and to practice good money management can find many interesting opportunities in very short time frames. Trading in time units longer than usual (30 minutes to an hour, for example) and trading slightly less volatile stock market indices, such as the DAX30, can help the less experienced reduce risk.
- A mixed strategy, and perhaps the best for those who want to make the most of the current market phase without taking too many risks, consists of holding a long-term investment with less risk, while practising short-term trading in order to maximise profits. Depending on your risk appetite, you can choose to invest more heavily in one or the other methods of investment.
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When will the coronavirus stock market crash end?
Many investors are trying to find out exactly when the global stock markets, with Wall Street and Europe leading, bounce back from these losses. One possibility can be what happened in China. In China, drastic measures hampered activity for a certain period, but the coronavirus epidemic eventually slowed down and activity began to resume. The Chinese stock market followed this trend, rebounding as the coronavirus reached its peak.
In the rest of the world, the epidemic is still expanding, and investors struggle to see the end of the coronavirus. Periods of relief remain, notably with announcements of political support, such as the Fed's rate cut, or support plans hinted at by US President Donald Trump.
But this has negligible ability to stabilise the fall of the stock market indices, before the fall continues.
Investors need to feel confident that the coronavirus is also starting to slow down in Europe and the United States. This could give them the confidence they need to return in numbers to the stock markets.
In the meantime, stock market indices may still continue to fall, even if stabilisation with the support of fiscal and monetary policies arrives.
The history of stock market crashes
The tulip stock market crash of 1637
The tulip market crash is the first in history. The tulip crisis occurred in February 1637 in Holland, following a speculative bubble on the prices of tulips, a flower which arrived from Constantinople just a few years earlier, and very popular with the bourgeois and aristocratic class of Europe.
Promises of sales of tulip "bulbs" via futures contracts quickly exceeded the quantities available, and prices collapsed in 1637. At the height of the tulip bubble, the bulb was trading at an amount equivalent to 20 times the annual salary of a worker.
The impact of this tulip crash has divided historians. According to some, a serious economic crisis ensued, while others report that the impact was rather moderate.
The stock market crash of 1929
The 1929 stock market crash is the most famous in history, and the first stock market crash of the industrialised world. The crash started on "Black Thursday" on October 24, marking the start of the Great Depression and the 1929 crisis that affected the entire American economy and then the world.
The reason for the 1929 stock market crash came from a speculative bubble fueled by the credit stock purchase system introduced in the early 1920s in the United States.
The crash triggered a collapse in the US, and the world's economy which unfolded over the following three years.
The economy began to recover at the dawn of the Second World War, as the arms race gave a boost to the economy and to the financial markets.
The stock market crash of 1973
The stock market crash of 1973, also known as the first oil shock, represents the end of the 30 years of economic growth and full employment that followed the Second World War.
The 1973 crash is among the few which did not find its start in the explosion of a speculative bubble. The 1973 crisis began with the sharp rise in oil prices, which went from $3 in October 1973, to $12 in March 1974, because of the embargo of the Arab oil-producing countries against the allies of Israel, decided after the Yom Kippur War. This embargo worsened an already fragile situation in the oil market, following the peak in production in the United States and the abandonment of the Bretton-Woods agreements in 1971.
The sharp rise in oil prices suffocated the world economy, which was entering a recession. The consequences of the 1973 oil shock were felt by the world's economy until 1978.
A second oil shock occurred in 1979, because of the Iranian revolution and the interruption of oil exports from the country for four months. Oil prices rapidly swung from around $17 to $35, slowing the fragile global economic recovery.
The stock market crash of 1987
The crash of Black Monday October 19, 1987, one of the worst days on Wall Street, next to Black Thursday and Wall Street crash of 1929. On Black Monday, the Dow Jones lost 22.6% of its value in one session, breaking the previous record of 1929 (-12.6%). Elsewhere in the world, the Paris stock market lost 9.7%, that of London fell 26% and there was a dizzying fall of 46% in Hong Kong.
This crisis of 1987 followed a speculative bubble in equities, which had experienced an almost uninterrupted rise during the 5 preceding years, under Reagan and his neoliberal revolution. The starting point for the 1978 stock market crash was, however, the publication of the growing US trade deficit.
The Wall Street stock market crash in 1978 was the first where computers and automatic trading systems were implicated. The robots sold in great numbers after the start of the decline, further fueling the fall in stocks.
The stock market panic of 1978, luckily, occurred in a prosperous global economic context, which helped stem the shock wave. The global economy is not affected too much. Further relief came from a quick and effective response from the Fed.
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The stock market crash of 2000
The market crash of 2000, and the collapse of the internet bubble, started in April 2000, and lasted 3 years.
The end of the 1990s was very prosperous for the stock markets, and led to the internet bubble of 1999 and 2000. The Nasdaq technological index multiplied by 5 from 1998, to its peak recorded in March, 2000.
The slowdown began in April 2000, after the Wanadoo IPO and the financial woes of Global Crossing, but the real crash started a little later, towards the end of 2000. It then accelerated a stock market crash in 2001, reinforced by the attacks of September 11, 2001.
The stock market crash and the Internet bubble crisis of 2000 ended in 2003, with a rebound in the financial markets beginning in March.
The stock market crash of 2008
The global financial crisis of 2008, which followed the bursting of the 2007 US housing bubble, is also known as the subprime crisis.
As the stock markets began their bear cycle in 2007, which resulted in the bankruptcy of the Lehman Brothers merchant bank. This was announced on Monday September 15, 2008, and accelerated the wall street stock market crash of 2008. It was on Monday, October 6, 2008, that the great crash began, commencing the start of the 2008 stock market crisis.
The housing bubble formed following the issuing of unsecured loans, which fuelled demand. However, after the Fed's rate hike in 2005, which increased the cost of repaying loans, the number of defaults quickly began to climb, reaching 15% in 2007.
The real estate crisis began to settle in, and prices gradually fell, causing a series of bankruptcies in credit organisations and investment funds.
The subprime crisis and the crash of 2008 then quickly spread to the rest of the world, largely because of securitisation mechanisms, with which non-repayable loans in the United States end up in the hands of financial institutions across the world.
The 2008 financial crash affected, directly or indirectly, the entire world economy, in almost all sectors.
The 2008 crisis is also at the origin of the debt crisis and the stock market crash of 2011, because of the great efforts of public expenditure made by the States to save the banks and the financial institutions.
The stock market crash of 2011
Like the oil shocks of 1973 and 1979, the 2011 market crash did not follow the growth of a speculative bubble. The difficult economic and financial context coming out of the 2008 stock market crisis created this period of stock market downturn in mid-2011.
The Nordic states posted large public deficits following the economic crisis of 2008, and the returning growth was extremely fragile by the start of the summer of 2011. In this difficult context, issues such as the Greek debt crisis and its possible exit from the Euro, the risks of bankruptcies from certain banks, rumors about Spanish debt and the announcement of early elections, downgrades in the ratings of several countries, and a wave of austerity plans and disappointing economic figures in Europe and the United States have further aggravated the situation.
Investor confidence took a hit, and that negatively impacted stock market prices.
Conclusion: stock market crashes
This hasn't been the first time the world has watched in fear of a coming stock market crash, and it won't be the last. However, there was many ways to navigate the state of crisis elegantly. Despite the downturn, there are many ways to trade the volatility that comes with this time, and traders with a mind for risk appetite and loss prevention techniques can find many ways to succeed.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.