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Coronavirus: A Trigger to Another Financial Crisis?

An economy is best judged not in fair weather but foul.

The global market today is in mayhem with NASDAQ falling by huge numbers, gold prices surging and the world economy projected to grow at 2.4% in 2020, it’s slowest since 2008. However, this is not the first time that the market has tumbled into such a correction. A look into the major financial crisis of 1987, 2000-01 and 2008 paint us a clear picture of the downturn the market has taken today triggered by an outbreak of Coronavirus with over 96.612 cases reported worldwide.

The collective data of the financial crisis of 1987, 2000-2001 and 2008 give us a clear picture of the correlation between bond yields, gold prices, federal rate cuts, and dollar index when NASDAQ faces a crash. (refer chart/sheet)

As of 1987 Black Monday, there was the largest one-day percentage drop in stock market history, when Dow Jones Industrial Average dropped 22.61%, falling 508 points to 1738.74. The S&P 500 fell 20.4%, dropping 57.64 points to 225.06 and it took two years for the Dow to regain this loss. The crash could be a reason for recession but the Federal Reserve helped to stabilize the market, reducing the rates by 0.50 basis points thereby pumping money into it. During such a crash, the investors move towards risk-free investments resulting in a fall in the Bond yields due to a rise in Bond prices because of increasing demand and the same is the case with Gold Futures pricesGold Futures prices rise as investors prefer gold over any other riskier security. As is seen,  NASDAQ tumbles down by huge correction into the markets but the US Dollar Index gets stronger in comparison to other currencies, as is empirically proven these crashes impact the global market and investors go for US Dollar as a safe haven. 

Before the dotcom bubble, the value of equity markets grew exponentially, with the technology-dominated Nasdaq index rising from under 1,000 to more than 5,000 between the years 1995 and 2000. In 2001 and through 2002 the bubble burst, equities entered a bear market with NASDAQ witnessing almost 77% drop, resulting in a loss of billions. At this time too Bond yield fell and Gold Futures rose after the crash period. NASDAQ shows huge correction resulting in its impact on the global markets too thus affecting Nifty 50. The US Dollar Index reached its high during 2000-2002 as even after the stock market crash investors prefer US Dollar over other currencies.

However, the US had to yet face its biggest recession until now. The financial crisis of 2008 was set off by a decline in housing prices as borrowers defaulted on loans and mortgages. The crisis by the end of 2008 developed into a full-blown international banking crisis. The US lost $7.4 trillion in stock wealth from July 2008 to March 2009. After October 2008, one month after the market crashed, bond yields fell by 48.27% and gold futures prices rose from 800 to 1000 in just six months. Following the crisis, NASDAQ fell to 1112.53 points in February of 2009. Fearing the crisis had only affected the US market, investors bought euros. However, the impact of the crisis was global as the European market was also affected. Adding to this, the Feds took corrective measures by lowering the rates up to eight times. As a result, the faith in the USD was restored strengthening the Dollar index by 22%. 

 

  

Global Markets today show the same trends as at the time of the above-mentioned crisis. The major cause for this correction window in the market is the outbreak of the novel Coronavirus as more and more cases are reported globally. At the present time, there is a fall in bond yields andrise in the prices of Gold Futures showing a movement of investors towards risk-free investments. The US Dollar is getting stronger again and is going to rise more. Dow Jones Industrial Average corrected 3500 points in just one week. NASDAQ also corrected 1300 points in a week. 

 Taking a cue from the history of major stock market crashes we conclude that this the golden time for investors to invest in the market. However, we ask traders to practice caution as this volatility might result in huge capital losses given the trend in the market might not even give traders a chance to decide to short.

Now, comes the million-dollar question of whether to invest 100% in one fall? 

No one knows at what point the market will hit bottom, but what is known is that it is a good opportunity to invest money into the market. Investment in such scenarios is preferred to be on Proportionate Basis. 

We have seen Nifty fall from High of 12400 t0 11000 but it isn’t certain if it has hit bottom or not. This is the reason Proportionate Investments are recommended instead of one-time Lump Sum investments. It is more profitable and safer to divide your capital into different proportions to invest in different time frames rather than investing the total capital in one go at one time. The former method adds to your wealth in the long run in a less risky way as your average cost reduces along with each fall in the market. The psychology to practice in the making of such investment decisions is not to panic: buy when others have fear, sell when others are greedy.

Research Prepared by GREEN STONE WEALTH MANAGEMENT

 

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