Will the Stock Market Crash again?
Created on 10 Jul 2020
Wraps up in 7 Min
Read by 10.8k people
Updated on 02 Sep 2020
With half of 2020 already over and countries still battling the coronavirus pandemic, there is a lot of volatility and uncertainty in the global markets. Many critics believe that the stock markets have yet not reached their lows, and there is a threat that may stock market crash again soon.
According to the International Monetary Fund's report released in the month of April, the global growth of 2020 is projected to fall to -3 %. This is a downgrade of 6.3 percentage points from January 2020. This makes the 'Great Lockdown' the worst recession since The Great Depression of the 1920s and a far worse scenario than the Great Recession of 2008, and this is going to affect millions of people worldwide.
However, before discussing whether this stock market crash would happen and how it would affect everyone, we should try to understand the words recession, depression, and slow down. These words are often interchangeably used, but they are quite different. The difference is that the word slowdown means when the country's economic growth or the GDP slows down. In this scenario, the growth rate is not harmful, but it is very less when compared to previous years. If we look at our country, India has been going through an economic slowdown for the past couple of years, even before the pandemic struck.
So, the slowdown is not synonymous with the word recession. Recession is when there is negative GDP growth for at least two successive quarters, and depression is when recession continues for an elongated period. It is when the economies face -10% or even worse GDP growth for more than three years. The last time that the world witnessed a depression was The Great Depression of the 1920s, which lasted for approximately ten years.
Looking at the Past Scenarios
Many people are comparing the current situation with the Great Depression and the Great Recession. However, looking at all the available data, many economists believe that today's situation might be worse than that of 2008. If we start comparing the data, we see that by the first week of June, India had an unemployment rate of about 22%, and the U.S. had an unemployment rate of 13.3%.
If we compare this to the past data, we see that during the 2008 crisis, the peak unemployment rate of India and America was 5.63% and 9.63%, respectively. While the unemployment rate touched a level of 24.9% in the 1920 depression. The current rates do trigger warning bells in our minds as they are quite comparable to the ones in 1920. Coming to the growth
rates, we see that America has already hit a negative growth for the first quarter of 2020, France saw a negative growth of -6% for the first quarter and the U.K. suffered a 20.4% fall in its GDP in April from its March figure. According to recent estimates for the entire year, India might see a GDP of -1 to -2%, and America may see a GDP rate of -5 to -10%.
Comparing this to the 2008 crisis, there was a 3.09% and -2.5% GDP rate in India and the U.S., respectively, while during the Great Depression, there was a global GDP rate of -15%. These figures just tell us that this economic crisis should not be taken lightly.
The Current Condition of the Stock Market
With several countries spending the first three to four months of 2020 in lockdown with no economic activity, numerous industries have taken a massive hit. Some of the worst affected are the Hotel, Tourism, and Aviation Industry. With social distancing, countries around the world shut down their boundaries temporarily. That meant that no tourists and flights were either allowed to enter or leave. Other than that, the entertainment industry has also been majorly affected. Movie theatres, restaurants, stadiums, clubs, everything closed down, and even the production of various shows and movies were stopped temporarily.
This has led to laying off of many employees all across the globe. Other activities like exports, manufacturing, etc. have also been impacted. Other than this, many other industries have been severely affected. Due to these reasons, the stock market has been falling since the months of February and March. Although it has already started recovering, we do not know if this recovery will only be short-lived. If we track the journey of the stock market in India during this pandemic, we see that the Sensex dropped from the level of around 42000 in mid-January to 26000 on 23 rd March when the first lockdown was announced in India.
This was a drop of 38%. After the 26000 low, the market started recovering and grew by 32% to 34300 on 5th June. Looking at the past data, in 2008, Sensex saw a fall of around 61% from about 21000 in January 2008 to be around 8200 in March 2009, which is a period of 14 months. Even during the Great Depression, the Dow Jones saw a fall of 89% over a period of three years, after which it saw a steady recovery. During both these events, the markets saw recoveries or bull runs as well, but these were short-lived. So, there were both ups and downs. These short-term recoveries often times lead people to have to confront views on what might happen next. There can be two types of views- a bullish view and a bearish view.
The Different Views of Investors
People who have a bullish view are optimistic about the functioning of the economy and believe that these recoveries are not short-lived but are there to stay long-term. They think that the economy is well on its way to see only the upside now. They think so because, according to them, lockdowns have already been lifted in many parts of the world, and with economic activity starting in many industries, there should be no dips in the stock market anymore. Also, many countries have announced their relief packages, which would benefit a lot of people, and due to such good fundamentals, they think the economy would do well. Many believe that the worst-case scenario has already been seen, and these scenarios have already been factored in. So, with vaccine trials in progress, there could be no further bad news.
On the other hand, people who are bearish have the opposite view of those with a bullish view. They think that the worst is yet to come. They believe that the rallying of the market is only for the short term, and it is a bull trap. According to them, after a short period of upside, the market will again start to fall. This view is also because even though people are worn down because of the pandemic, the pandemic is still not tired and does not show signs of tiring anytime soon. The development of a vaccine could take several months, and until then, this crisis is not stopping. Also, India is now the third-highest country for the total number of COVID cases, and with the numbers continuing to rise, the hopes of the stock market rising can only be wishful thinking.
What Should We Do?
During this lockdown period, something to be noticed was the increase in the number of account openings for traders, and the increase in retail participation. This is one reason why the stock market has not yet dropped to the levels everyone was predicting. The reason for this increased participation in the stock market is because many people were forced to stay in their homes, and with nothing else to do, many turned towards the stock market. This was the case, especially with many salaried, middle-class people, who, after having their primary mode of income reduced, started relying on the volatile stock markets.
This was also the case with many students who now had extra time on their hands. This increased participation includes many investors who are amateurs and who do not have sufficient knowledge about the sectors and securities they are investing in. Many are affected by their behavioral and psychological biases and follow the herd to make short-term gains on 'trending.' While this could result in a lot of gains, this could also result in a lot of losses, which would become very difficult for the investors to recover from. Irrespective of whether we have a bullish or a bearish view on the market, we should invest carefully.
In these unprecedented circumstances, one must invest in those companies that they believe will do well in the long run and which would be able to recover even after the pandemic. Companies with strong fundamentals must be selected so that they have less debt and a history of good and consistent performance. These companies should be trustworthy and ones that the investor believes in. We should carefully select the sectors that we would be investing in. While investing in defensive industries like healthcare, pharma, telecom, and consumer staples is quite rational, we should also not disregard companies in the discretionary sector. There might be some really strong players in such sectors, and investors could really profit by getting such good companies at lower prices during this period. Investing time in looking for these companies might pay off.
Instead of following the crowd, we should conduct sufficient due diligence to safeguard ourselves from any losses. According to us, the chances of the market rising to its previous levels or the stock market crash, witnessing a dramatic jump in the prices is very low. We are of the opinion that the market could either follow a sideways trend and remain steady at the current levels, or we could expect a fall in the markets in the coming months. However, how much would the market actually fall or which view is indeed correct, that only time will tell.
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