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Why Is COVID-19 Making The Stock Market Crash?

America is on the brink of one of the most destructive periods in its financial history.

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America is on the brink of one of the most destructive periods in its financial history. Stocks have collapsed 35% since the coronavirus (Covid 19), which spread globally last month. More than $8 trillion in shareholder value has been obliterated in the past month with automatic circuit breakers halting trading to stall frenzied sell-offs. The market has never seen such a deep plunge since the crash of 1928, which preceded Black Tuesday stoking fears of a similar economic recession or worse. Nearly three weeks, 51,552 cases and 663 deaths later it is unclear how much worse it can get.  

When the DOW (Dow Jones Industrial Average), an index of 30 blue-chip stocks which is used to gauge the health of the market itself, fell 1,191 points last week, the drop felt particularly drastic because two weeks prior, it had hit a record high.

Which Is More Frightening? News From Epidemiologists Or Economists? 

Social distancing means people cannot go shopping, eat out at restaurants or go to work. Labor has stopped and businesses stop making their products. Without demand, there is no supply, which threatens the fate of the American economy. Global pandemics fuel panic and chaos, which the markets do not like.

2008 vs 2020 Market

While the current state of the economy is somewhat reminiscent of 2008, there is a fundamental difference- the economy was stable, but credit markets were frozen. Today, the real economy is in disarray. With millions of workers forced to shelter in, factories and the machinery they operate lay dormant. 

At the height of the recession, economists claimed the real economy was fine. Americans were working at factories and machines were being operated. There was no physical reason for economic crises. The cause was an output gap-the difference between what the economy could produce and what it was actually producing. 

The mistake the U.S. made in 2008 was underestimating the output gap. The stimulus package was insufficient to resuscitate the faltering economy. 

At this time of writing, Congress is attempting to finalize a $2 trillion economic stabilization plan to respond to the coronavirus pandemic.

What Should Investors Do? 

In 2003, there was an outbreak of Severe Acute Respiratory Syndrome (SARS). During the outbreak, restrictions were placed on travel, borders were closed and thousands of people were quarantined.

Within several months the epidemic was contained. In the years since, the world has dealt with Avian and Swine Flus, MERS, Ebola and Zika viruses. 

Economists suggest investors follow market trends and build watchlists of stocks performing well. Look for stocks that boast relatively rising relative strength lines reflecting their outperformance vs. the S&P 500 index. As for 401ks and other retirement plans, it is a judgment call. Capital preservation is crucial for those close to retirement.  Those who are not ready to retire may choose to stay the course.  

However, with no indication of when the coronavirus will be contained, for those without a financial plan, now is a good time to start one.

About the Author

Renee Barrett was born in Brooklyn, New York and grew up in Toronto, Canada. She currently resides in the Bronx.  Renee holds master’s degrees in both Urban Administration and Education and is the proud mother of 7-year-old twins Zach and Noah.

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