To Buy Or Not to Buy? Was This All the Stock Market Coronavirus Crash?

Bear, symbol of the downtrend.

Summary

  • Are we in a stock market stock market coronavirus crash? Not yet.
  • Real crashes can be far deeper and longer.
  • Perhaps it’s not over. The virus could spread much more. Markets seemed to be overpriced before the outbreak already.
  • The good news is, central banks and governments are willing to take extraordinary measures.

Is This a Crash Or Not?

Stock markets had hard days in February. At the time of writing, investors were guessing if we are in the middle of a stock market coronavirus crash, or not. Or, only at the beginning. And if it’s time to buy stocks now or is this too early. Last week, some stock exchange indices had their worst week since the “Lehman-crash” in 2008-2009. In Europe and North America, they fell 10-15 percent, in Asia, only 4-10 percent, approximately. (Week February 24-28, 2020.) This week, so far, we saw a roller-coaster, indices went up, down, up. Still, one-year and three-year index returns are, in a part, positive. Or, at least, near zero.

Chart 1: 1 year of the S&P 500 index (US) and the DAX index (Germany).
Chart 1: One year of the S&P 500 index (US) and the DAX index (Germany). (Tradingview.com)

But what means crash? In the stock market, “a correction” is considered if the main index falls more than ten percent. It’s a “short-term trend that has a duration of fewer than two months.” (Investopedia) A bear market is a greater, longer downtrend with an overall pessimism. Professionals are talking about it if prices fall 20 percent or more from recent highs. And a stock market crash is:

A rapid and often unanticipated drop in stock prices. A stock market crash can be a side effect of major catastrophic events, economic crisis or the collapse of a long-term speculative bubble. (…) abrupt double-digit percentage drop in a stock index over the course of a few days. (Investopedia)

Can the Fed Stop the Stock Market Coronavirus Crash?

Are we in a stock market coronavirus crash, then? Not yet. Neither the speed nor the extent of the fall indicates a crash. As well as no bear market has developed yet. The state and future of the stock market depend now to a large extent on the news about the spreading or containing the coronavirus. But also on the economic and political effects.

The Fed (Federal Reserve, the Central Bank of the USA) cut rates on Tuesday, by 0.5 percentage points. But the market reaction wasn’t entirely positive. Many people have serious concerns if an interest rate cut can solve the coronavirus-crisis. Stop the impacts of the plague on the production and the stock market.

That’s How a Real Crash Looks Like

If the virus unfolds across the globe and causes much more damage, it can cause a far greater stock market panic and collapse. A real crash. A decline, for example, when prices fall by 12 percent, not in a week or two, but a single day. Perhaps, in hours.

However, with the arrival of really good news, such as the rapid rollback of the virus, capital markets may forget this crisis in a few days. Indexes are still not very far away from their historical peak so far and can set new records soon.

Chart 2: The greatest stock market crash in history. The rise and decline of the S&P 500 index (estimated values), in the 1920s and 1930s. (The Great Depression.)
Chart 2: The greatest stock market crash in history. The rise and decline of the S&P 500 index (estimated values), in the 1920s and 1930s. (The Great Depression.)

On the chart, I marked the –20 percent decline from the top with the first arrow. And the more than –87 percent on the bottom of the crash in 1932. We are very far away from that. This “Great Depression” was the worst crash in history, very deep and very long. Many others “only” caused 25-50 percent slumps in average stock prices. Or, the impact resulted to be temporal and the recovery fast.

Looking Beyond the Virus

The problem is, stock markets seemed to be already overpriced in the long term. Long before the coronavirus outbreak. Global growth was decreasing, and economies of some countries like Germany already stagnating. Large countries like the USA, Brazil, continents like Africa or South-America, have reported only a few coronavirus cases so far. The spreading of the epidemic can take a new swing, impetus in new places. The bad news about production, commerce, businesses can be much worse than up to the present.

On the other hand, all G7* countries seem very determined to curb the economic impact of the virus. I assume, after rate cuts and other measures by central banks, government measures will be on the agenda. Like tax cuts and state subsidies, social benefits. (Fiscal policy.) In Germany, politicians are already discussing this option.

And the very common argument of stock market bulls got stronger these days. This is, shares valuations can be high because interests or bond yields are extremely low. In this environment, stocks are still a good option – perhaps the only good option to fight inflation. Read about the historic stock market returns here: Can You, Indeed, Build a Decent Passive Income with Stocks? 

(*The G7 are the most advanced economies in the world: Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. But China is also taking strong measures to curb economy.)

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(Cover photo: by ArtTower from Pixabay. The bear is the symbol of a declining stock market.)

Disclaimer

I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research or consult your advisors before making any investment or financial or legal decisions.

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