A stock market crash an unexpected tense reduction of stock prices in the stock exchange. The Wall Street Crash of 1929 was the first-ever share market crash in the U.S. that lasted for one month. This resulted in reduced trust in Wall Street stock market that translated to the Great Depression. The 2020 stock market downturn began on 20th February and has affected the whole world as a result of the ongoing Corona Virus epidemic. A stock market crash is caused by panic and the existing economic trends in the market.
The existence of an inverted yield curve shows that there is a likelihood of a recession in the following financial year. The anticipation of future recessionary pressures strikes panic towards the stock market investors. Following the spread of Corona Virus Covid-19, there is increased fears of world recession because of reduced business transactions and less transportation. This necessitated the Federal Reserve to reduce interest rates thereby sending investors into a panic.
Even though the stock market has not been heavily affected by the Corona Virus pandemic, investors are in a panic that if the virus might have a lasting impact on the global economy if it continues to spread. According to the latest fatality rate, investors are in a state of panic that this epidemic will lead to more disruptions, reduced shares demand. These anticipation has translated to increased selling of shares at a cheap price. Additionally, investors would accept lower reimbursements on their long term bonds securities because they anticipate future investment returns to be deeper than the current returns.
Widespread Complacency. Trends in the Consumer Price Index may signify imminent inflation. This can foretell a rise in interest rate, which is usually serious for stocks. Moreover, rising state debts also suggest that the government will hike the interest rates to set off the deficits so as to stabilize the economy. Any of these factors can influence the market sentiment by indicating the likelihood of brighter and dull days in the stock market. Investors will perceive the market based on these sentiments and make rational decisions.
Declining Credit Quality is a clear indication that the stock market is in a mess. When the credit is growing it signifies that the economy is equally expanding.
Irrational Exuberance. When the authenticity is too painful to bear, Freud claims, we substitute for truth with less harmful deceit even though it will make us perverse. According to Freud, housing expenses and the stock market prices must always boom and must be conceded in its social setting. Based on Freud’s Irrational Exuberance theory, it is evident that any news is good news even though some news is painful to conceive. The unexpected crisis causes a lot of economic meltdowns globally.
Furthermore, the media plays a fundamental role in influencing the shifts in the stock market. High communications pessimism foretells downward force on market prices followed by a reversion to critical, and unusually abrupt pessimism predicts increased market trading capacity. Investors make judgements concerning the stock market by relying on the information from the media. When the media advertises that their might be recession or inflation in future, the investors act accordingly putting into consideration their profit motive mechanism.
The signals mentioned above indicate when the stock market is on a crash thereby enabling the investor to make rational decisions on whether to accept low-interest rates or to sell their shares at the existing market price.