US Stock Markets Tank 30% – Will the Meltdown Continue

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US Stock Markets Tank 30% – Will the Meltdown Continue?

The risk of a sudden stop in global economic activity, due to the coronavirus outbreak and the recent oil shock, had prompted massive selling in the US stock markets, with all three major indices tanking by approximately 30% until March 12 th . Right now, the market is dominated by fear and without an end in sight, the worst-case scenario continues to be priced in.

What could turn the tide?

So far, the US Federal Reserve had cut its benchmark interest rate by 50 basis points and just had announced three rounds of 3-months repo operations that will inject 1.5 trillion dollars in liquidity. That confirms all major banks are facing serious challenges and with assistance from the Fed, could things turn the other way around?

Although the massive drop is easily understandable due to deteriorating economic prospects, it does not mean markets will go to zero. From a technical point of view, the likelihood of a sharp rebound is very high, given the current extreme oversold conditions. In the longer-run, we might witness continues pressure on risk assets (stocks), but the short-run favors a technical rebound, or “dead cat bounce” as analysts like to call it.

It is true that gold and bonds had outperformed, confirming the strong demand for safe assets, but same as 2008, when the global financial crisis started, the massive drop in yields had been followed by a strong rebound. CFD traders must understand that market participants are not always in sync with what happens in the economy at any given time. Institutional investors are allocating capital based on their expectations for the future.

A recession or depression ahead?

Stock markets had always acted as an early signal for what lies ahead from an economic standpoint. The 30% drop and the VIX (Chicago volatility index) standing at 70, we will surely have a recession in 2020 or 2021. The issue, though, had to do with the huge amount of debt outstanding at a global scale.

The world hadn’t seen such a high level of indebtedness since WWII and the same as it happened then, a period when the debt had to be reduced had occurred. Depending on how things will progress in the near term, the same thing could happen during the next 2-3 years. We could be at the end of a long-term debt-cycle, as Ray Dalio, a famous US investor, in claiming, and the economic implications will be severe if that turns out to be true.

US stocks could plunge 20% more after falling into bear market: Goldman

Getty Images / Mario Tama

  • The S&P 500 could fall another 20% before reaching its floor and rebounding through the rest of the year, Goldman Sachs analysts wrote Friday.
  • The benchmark index has already been dragged into bear market territory by the coronavirus’ “unprecedented financial and societal disruption,” the analysts said.
  • Continued supply chain issues, weak demand, and investor positioning could drag the index to 2,000 in the middle of 2020, according to the bank.
  • Such slumps are typically followed by “sharp rebounds,” the firm added, projecting the S&P 500 will close the year near 3,200.
  • Watch the S&P 500 update live here.

After three weeks of intense volatility fueled the stock market’s fastest ever dive into bearish territory, Goldman Sachs sees plenty more room to fall before prices bottom out.

The S&P 500 can plunge as low as 2,000 before recovering through the rest of the year, the investment bank wrote Friday. The level is the benchmark index’s lowest since early 2020 and implies a 20% decline from Monday’s open. Such a tumble would also place the index more than 40% below its February 19 peak.

The coronavirus outbreak is responsible for “unprecedented financial and societal disruption,” the analysts said, and equities have so far served as accurate leading indicators before the release of relevant earnings or macroeconomic data.

The team led by chief equity strategist David Kostin also lowered the firm’s S&P 500 earnings outlook. Goldman adjusted its model to account for a profit recession in 2020 after first projecting 0% profit growth just weeks ago. The firm’s new estimate “assumes supply chain disruption, weak US and global consumption, and lower oil prices and interest rates than we previously expected.”

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The analysts’ more hopeful estimate pegged the S&P 500’s floor at 2,450 within the next three months, yet Monday’s sharp decline already pushed the index below that target. Falling to 2,000 would require a “combination of thin liquidity, high uncertainty, and positioning,” Goldman said.

US equities tanked nearly 30% last week to usher in the first bear market in 12 years. Selling began in late February as new coronavirus outbreaks outside China gripped investors. Stocks sank further through March as Wall Street feared the Trump administration wasn’t acting fast enough to issue fiscal stimulus and pad the ailing economy.

While equities ended Friday higher, the relief rally was entirely erased in early Monday trading. Stocks sank low enough to trigger a marketwide circuit breaker minutes after the open, bringing the third trading halt in just six sessions.

The outbreak’s outsized fallout won’t be concentrated in the financial sector, according to a separate Goldman note released Sunday. The bank expects the outbreak and its hit to economic activity to drag the US into a recession in 2020. The country’s GDP growth will drag to a stop in the first quarter before contracting 5% in the second quarter, the bank’s analysts wrote.

Despite anticipating a steep market decline and lack of profit growth throughout the year, the Goldman analysts still see the resurgence of a bull market before 2021. The firm pointed to both the Russian sovereign debt default of 1998 and 2020’s eurozone crisis, where stock market declines were overshadowed by rallies of nearly 30%. Goldman sees the S&P 500 reaching 3,200 by the end of the year, just 5.5% off its all-time high.

“The lesson of prior event-driven bear markets is that financial devastation ultimately allows a new bull market to be born,” the analysts said.

The S&P 500 sat at 2,457.99 as of 10:25 a.m. ET Monday, down about 23.7% year-to-date.

Now read more markets coverage from Markets Insider and Business Insider:

One Thing Never to Do When the Stock Market Goes Down

When the stock market goes down and the value of our portfolio decreases, it’s tempting to ask our finance advisors what we should do. Instead, we should be asking: What should I not do?

For example, don’t panic. This is often our first reaction to a drastic drop in the value of our hard-earned funds. To prevent this unfortunate situation, know your risk tolerance and how this will affect the volatility of your portfolio. Then, hedge against the risk of a drop in the market by diversifying your portfolio.

Knowing your risk tolerance and creating a portfolio and strategy that reflects your tolerance level will help you to avoid panicking in the event of a market downturn.

Why You Shouldn’t Panic

Investing helps us safeguard our retirement, put our savings to their most efficient use, and grow our wealth with compound interest. Why, then, do close to 50% of Americans choose not to invest in the stock market? A 2020 report by Gallop concludes that investors were spooked by the financial crisis and have little confidence in the stock market.

A downturn in the market is a temporary thing. Thus, it is better to think long term than to panic and sell stock at a low during a downturn. Have a strategy for different outcomes instead. Here are a few steps you can take to make sure that you do not commit the number one mistake when the stock market goes down.

Key Takeaways

  • Knowing your risk tolerance level will help you to choose the right investments and to avoid panicking during an economic downturn.
  • Diversifying a portfolio with real estate or derivatives can insure against risk and market crashes.
  • Experimenting with stock simulators (before investing real money) can give you an idea of the volatility of the stock market and your response to it.

Understanding Your Risk Tolerance

Investors can probably all remember their first experience with a market downturn. Rapid drops in the price of an early investor’s portfolio are unsettling to say the least. A way to prevent the ensuing shock is to experiment with stock market simulators before investing for real. With stock market simulators, individuals can manage $100,000 of “virtual cash” and experience the common ebbs and flows of the stock market. You can then establish your identity as an investor with your own particular tolerance for risk.

Prepare For and Limit Your Losses

In order to invest with a clear mind, you must grasp how the stock market works. This way you can analyze unexpected downturns and decide whether you should sell or buy more.

The number of Americans who invest in the stock market.

Ultimately, you should be ready for the worst and have a solid strategy in place to hedge against your losses. Blindly investing in just stocks will cause you to lose everything if the market indeed crashes. To hedge against losses, investors buy insurance, but they also strategically make other investments.

Of course, by reducing risk, they face the risk-return tradeoff, in which the reduction in risk also reduces potential profits. A few ways to hedge against risk are to invest in financial instruments known as derivatives and to look into alternative investments such as real estate.

The Bottom Line

A market crash can be mentally devastating, particularly for the inexperienced investor. Panicking when your portfolio decreases drastically and selling is the worst thing to do. Avoid such a mistake by understanding how the market works and setting a personal risk tolerance. Experiment with a stock simulator to identify your tolerance for risk and insure against losses with diversification. Patience, not panic, is what you need to be a successful investor.

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