Since February this year, the global Coronavirus pandemic, or Covid-19, has caused panic in the stock market. Even its effect has diminished, and although technical analysis indicates that a recovery is likely, uncertainty and doubt have already dominated the minds of investors. For this reason, some argue that the stock market crash of 2020 will be of great magnitude. That said, even in difficult times, if you are smart and pragmatic, you will know how to take advantage of the best opportunities that come your way. In this article, we tell you everything you need to know to properly anticipate market movements.
Will there be a fall in the stock market in 2020?
Already in danger before the pandemic, the US stock market is now in a panic.
While on February 19th, the US stock market reached one of its highest peaks, as indicated by the S&P 500 benchmark index, it only took two weeks for the index to fall. almost 25%. As you can imagine, this is one of the strongest shocks in the history of the country, even before 2008 and the 1930’s! To give you an idea of the gravity of the situation, it took a whole month for the 1929 crash to reach this same rate of recession.
Of course, this year’s stock market crash did not only affect the United States. In fact, all the major markets have suffered colossal losses due to the pandemic. On average the fall in the value of the global stock markets has reached a third, and this is particularly alarming for all investors.
So the fateful question, to which we would all like to have an answer, is whether this recession will continue and, if so, how far it will go. Conversely, if it is going to stop, we would all like to know so that we can take advantage of the future upward trend as it begins and thereby generate more profit. The stock market is not just a centre of interest for investors. It is also the heart of employment, finance in general and the standard of living of citizens. In the next part, we will focus on the causes of the crisis and what differentiates it from other stock market falls of the last century.
Current fundamentals lead us to believe that this year’s fall will be at least as intense as that of 1973.
What are the causes of the stock market crisis in 2020?
Of course, the most important cause of this stock market crash is the global coronavirus pandemic, which began in China before affecting most of the rest of the world, especially Europe and North America. It is a particularly contagious virus that has no cure yet. Even if its death rate does not exceed 4 per cent, this percentage is still enormous and the damage the virus can cause in terms of human lives can be colossal.
For this reason, China has decided to establish containment in the city of Wuhan, in order to prevent the spread. While this has been effective enough to save the rest of the country, or at least significantly limit its spread, Western countries have not been quick enough to prevent the virus from reaching their territory. It even turns out that some developing countries responded much better and were able to block the virus before it arrived.
With such a development, the global stock market entered a phase of widespread panic, and this aggravated the fall in prices. This is an unprecedented situation, difficult to compare with previous cases.
Despite the brutality of the pandemic’s impact on global finance, we must not ignore two other important causes of this crisis. The first is the collapse of oil, which was the result of competition between Russia and Saudi Arabia. Several experts see this event as the first report of the accident. The second cause is speculation, which has driven the prices of stock market instruments to extremes. This phenomenon began just after the election of Donald Trump, which caused an incredible rise in the value of shares in general.
We will be able to compare these causes with others, on previous events that have affected the stock market, to know which ones can serve as reference in our analysis of future events.
When anticipating stock price developments, fundamental analysis is as important as technical analysis.
The comparison with the financial crises since the 1930s
The stock market crash of the 1930s was the most violent in our history.
In general, we can speak of a financial crisis when the price drops from a peak to more than 20%. Moreover, it is common to limit oneself to the highest peaks, as this leaves no room for doubt about the growth that precedes the fall. When referring to these criteria, we find that there have been a total of 13 financial crises, since 1929, and that includes the one in 2020. Moreover, it is possible to use the crucial statistics of these crises to classify them in terms of power.
According to the current data we have about the future recession, the crisis has already had enough to rank seventh. While we cannot say with certainty its final position, we already know that it will be among the most intense in human history. Moreover, it is difficult to say how long it will take for it to disappear and how far it will go in terms of losses.
From the technical analysis, it is possible to draw some conclusions:
- The fall in share prices in 2020 is the fastest in history, in more than 100 years.
- The magnitude of the recession during that same year is only matched by a single historical event during the same period.
The two most recent financial crises ended with price falls equivalent to 50%. It may seem that the volatility of accidents is steadily increasing over the past decades. Experts believe that this is due to technological advancement, which allows rapid remote trading, as well as the use of specific high frequency algorithms, which is probably causing stock movements to accelerate in the market.
Of the four major recessions, three took place over a period of more than six months. Rapidly developing recessions never seem to have such an impact. This is quite reassuring with respect to the crisis of 2020.
Based on the data cited here, it is not easy to reach clear and concise conclusions. That said, a technical analysis of stock charts can provide useful information.