Last week (9-13 march 2020) has been a very turbulent week on the markets. We saw extreme market changes to the downsides and the first part of what could become a much worse stock market crash.
The situation is extremely uncertain and we could really be at a turning point for the economy.
As the coronavirus keeps expanding and countries start their lockdown in order to slow down contagion, besides worldwide stock markets plunging, we may soon face serious challenges in the real economy.
Despite coronavirus being around since the beginning of the year 2020, it affected financial markets “all of a sudden” starting from the end of February, with the 24th as the first day with a very big impact.
This is the change of the index from 21st of February to the close on the 13th of march. Notice that the day before, the 12th of march it was -25% down.
The Dow Jones did even worse, declining 28% between February 11 and March 12, 2020. While we cannot say for sure where this crisis in going to lead us, I found this interesting comparison between this crash and other historic crash and crises:
- the Great Depression of 1929 (-89% decline)
- Black Monday of 1987 (-31%)
- the 2000s Recession (-34%)
- the Great Recession of 2007-08 (-49%)
While history never repeats itself, this comparison allows us to understand at a glance how big this crash already is and, since things are still playing out, how bigger it may become.
In the middle of this mess, with markets on panic selling mode, the FED announced a $1.5 trillion liquidity injection in one single week to contrast the sell-off, to calm Treasury-bill liquidity issues and boost economic activity amid coronavirus risks.
What to do during a stock market crash?
First and foremost: keep calm and don’t allow emotions to take over. Ok the market is crashing, but that’s normal! If you are investing you should take into account that sooner or later you will face a market crash along the way.
The good news is that (and here looking at the past really helps) no matter how big and devastating the crisis was, the market always recovered.
That’s not really a surprise if you think about what stocks are: shares of real businesses that produce goods and services for people that need them. Al long as there are people around needing things, there is a good chance that companies that satisfy those needs will be around too.
If you take any long-term chart, it’s easy to notice that crashes are more frequent than most people think. And it’s important to note that market booms are just as frequent.
The market is cyclical and will always have some turbulence. Remember that an investor’s goal is not to predict where the market is going but to follow a strategy that allows to reach the investment goal.
A stock market crash is a tremendous opportunity to buy, especially if you are in for the long-term because it is usually the market situation in which stocks get undervalued.
However, we don’t know if and how much lower it will go and what it takes for the following recovery to show up.
So, a good thing to do is to think about your risk tolerance and your current situation as the starting point from which investing decisions originate.
Remember that the market offers a new price every day and today’s price say nothing about tomorrow’s price.
In the short-term, the stock price depends mostly on supply-demand equilibrium between buyers and sellers while in the long-term it tends to reflect company fundamentals.
If you focus on the business instead of financial news and what’s happening the next week or month, chances are that you are set up successfully building your long-term wealth.
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This article is for informational purposes only, it should not be considered financial advice. You can read the full disclaimer here.