What Is a Stock Market Crash?
A 10% drop in the market index from the 52 weeks high over a relatively short period is a market correction, but when the market index plummets 20% or more in a matter of days, it is called a crash.
What causes the Stock Market to Crash?
Stock market crashes are part of regular trading activity. They usually happen at the close of a bull run when greed and excitement have forced prices to untenable heights, in today’s computer-driven markets quantitative trading that uses mathematical algorithms to trade stocks that can also cause market crashes.
A disaster, crisis or unexpected economic event can prompt a selling panic amongst investors and traders, producing prices to plummet.
What are the effects of a Stock Market crash?
When investors and traders experience a crash, they become very cautious, which often leads to a bear market.
Companies use funds created by stocks to administer and develop their businesses. A spectacular collapse in stock prices can cause the development of the company to grind to a halt, should this situation continue for a prolonged period, staff redundancy would become necessary for the company to stay afloat. A downward spiral ensues creating a recession.
Do’s and Don’ts in a Crash
The market will turn eventually, and prices will return to ‘normal’. Selling at a loss is not a good strategy; instead, diversify the portfolio, perhaps consider other markets that may not be as affected, such as the cryptocurrency market, bonds and commodities.
Cash to spare? Use the crash to buy into the market at rock bottom prices; eventually, the markets will rebalance, and investors will make profits on the upswing.
Keep re-diversifying the portfolio to protect against losses.
Opening Schools and Getting Back to Work
During the summer of 2020, the US government provided banks large sums of money to shore-up the stock market to prevent a crash, which resulted in record highs. The cash injection gave major investors time to get out of the market before a potential resurge of Covid-19.
Mid-September sees the Dow drop 510 points as coronavirus numbers continue to increase and investors are concerned that Congress will refuse to stimulate the markets with more cash before the election. Additional funds for businesses and people affected by the pandemic recession has not as yet found agreement, even after months of discussion in Congress.
Return of COVID-19 to Europe
Meanwhile, in Europe and the UK, a new wave of the Coronavirus begins to sweep the continent as schools and collages re-open, and people start to go back to work.
The consequence of the Dow and a resurge of Covid-19 in the UK have erased £50bn off of London shares. The government have the choice of tighter restrictions or lockdown. Thousands of people could see their jobs affected as businesses start to close. The travel industry is likely to be badly affected by further travel restrictions. The leisure industry, hotels and restaurants are likely to see more workforce cuts.
Frankfurt, Paris and Madrid have also suffered market losses as fears of a second lockdown are contemplated.
Private and work pensions invest in pension schemes that use the stock market to increase their value. Therefore, pensions are likely to be affected by the crash of the stock market, affecting millions of people. However, annuities that have long-term investments can recover their losses.
Cryptocurrencies are not exempt. Bitcoin is supposed to be enjoying a post-halving boom, but on Monday 21st September suffered a $700 loss as news of further Coronavirus restrictions across Europe. Altcoins are falling hard the cryptocurrency market cap lost around $18bn in one day.
On Tuesday 22nd September, a slight recovery of the stock market raised hopes that there would be a break in the downward trend. But Federal Reserve Chairman Jerome Powell restated to congress that the U.S. economy will slow down in the coming months without further financial stimuli.
“I would say many, most, (forecasters) assume some fiscal action, fiscal action underlies many, many current forecasts.”Federal Reserve Chairman Jerome Powell
However, the fight for the succession of Supreme Court Justice after the death of Ruth Bader Ginsburg is likely to hold up fiscal stimulus until after the elections, and the dispute between political parties before the election will undoubtedly throw another spanner in the works.
Tuesday’s surge proved to be false hope, and on wild Wednesday, the markets plunge 2% to 3%, unsettling investors. In London the Chancellor of the Exchequer, Rishi Sunak cancelled the Autumn budget (due in October).
Ongoing concerns about Covid-19 and the possibility of further restrictions and the lack of agreement from the US congress concerning fiscal stimulus caused the European and London stock markets to drop on Thursday.
All the signs are present to cause a stock market crash. It will almost certainly affect all areas of society, potentially leading to a recession.
The situation may continue to be unstable until the pandemic is under control. Those that can work from home should be the least affected.
Long-term investments are more likely to recover; diversification of the portfolio should help to protect from losses. If possible, take advantage of low prices.
Most importantly, DON’T PANIC!
Disclaimer: Opinions expressed at Bitcoin News Agency are not investment advice. Investors should do thorough research before investing in Bitcoin, digital assets or cryptocurrencies. Please be advised, transfers and trades are at your own risk, and any loses incurred are your responsibility. Bitcoin News Agency does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Bitcoin News Agency, an investment advisor. Please note that Bitcoin News Agency participates in affiliate marketing.
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