March 9, 2020, marked a tremendously important day in history. The big stock market crash, initiated nearly completely through natural causes and trade wars, has lead to a rise of uncertainty amongst the majority of American society.
Causes and effects of Black Monday
COVID-19 plays a huge role in the economy as the United States enters a bear market.
As per Investopedia, a bear market is a condition in which security prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. Typically, bear markets are associated with declines in an overall market or index.
As of March 11, the United States holds 1,267 confirmed cases and 38 deaths from the coronavirus, all spread over 43 states.
Along with a wave of panic and uncomfort due to the virus, the economy has taken a big toll of that apprehension on itself.
According to WIRED, COVID-19 compromised the United States' economy after its consequential peaks in the earlier parts of the year.
“Covid-19 was officially declared a pandemic Wednesday, and stocks officially entered a bear market, falling more than 20 percent from their peak just last month. The two milestones are related. Even in the best of times, markets are tuning forks not just for the sound of economic activity but for public sentiment about the future,” Karabell wrote.
Visually seen by those that work in the field, investment banker and financial analyst Dmitry Simakov, notices the extremity of COVID-19 on the finance world.
“As of now, the United States has a very limited effect of the virus, but it is growing substantially. In terms of the stock market, I think obviously COVID-19 has had a dramatic effect. We’ve had the sharpest decline in one single day since 1987, and we’re seeing the volatility index is higher than 2008-2009,” Simakov said.
The declaration of the pandemic caused for stocks to enter a bear market, declining at a rapid speed almost immediately.
However, COVID-19 was not the only constituent of the plummet in recent economic trends. The Russia-Saudi Arabia oil price war was a huge factor of the stock market crash as well.
The initiation of a price war by Saudi Arabia with Russia triggered a major fall in oil prices, hitting the currency's lowest level in over four years.
According to BBC News, the coronavirus and the oil price drop are closely connected in the influence of the stock market crash.
“The dramatic drops were triggered by a row between Saudi Arabia and Russia over oil output. Saudi Arabia said it would slash prices and pump more oil, sparking fears of a price war. This came after Russia rejected a proposal by oil exporters to cut supply to cope with lower demand due to the coronavirus outbreak,” BBC News reported.
This trigger lead to the widespread fear of a possible recession in Russia. Yet, with its unstable government and economy, Russia is at high-risk for corruption following a deal with Saudi Arabia.
Loss in consumer confidence
Major stock market crashes lead to a change in mentality and decline in consumer confidence when purchasing items, travelling, trading stock, and doing day-to-day business. This most recent crash, Black Monday on March 9, was initiated by the coronavirus and the oil price wars. Yet, the mentality of the public population changes nonetheless.
“I think this is the first natural crash, from a disease, and something that’s not caused by our own institution. It’s very external, highly fear based, and we don’t know exactly how to solve it because we’ve never faced something like this before,” Simakov said.
A wave of fear comes across people when a problem that hasn't been faced before arises. The next steps that will be taken by the government and local communities is completely unknown. A natural crash like this is very rare and highly fear based because of the uncertainty that lies ahead for the economy.
According to The Washington Post, people are not willing to spend as much money as usual during a stock market crash because they feel more impoverished than normal.
“The coronavirus has shaken consumer confidence. Trips have been canceled, schools shut and workers told to stay home. The combination of the virus and the huge drop in stock prices is likely to trigger a wealth effect. People spend less because they feel poorer,” Samuelson wrote.
People become scared because of the severity of actions taken regarding COVID-19. This fright comes upon society in a time of distress and causes for an affected mentality within people and the stock market.
People are also impacted very easily during this time of affliction. Scary headlines, and news stories influence people to either buy or sell stock, possibly conflicting their initial interest.
According to The Motley Fool, investors can be easily affected in regards to stock trading by what they're told to believe during a time of tension.
“Unfortunately, scary headlines about both often push the average investor to do the exact opposite of what they should do when a recession or stock market lull actually happens,” Motley Fool Staff wrote.
This crash is nothing like we've every seen before. Structured around fear and high-demand, average investors and societal members are influenced by everything they're told.
“In a regular financial situation, you can restructure mortgages, put money into the market to help liquidity, and eventually it will recover. But this is like something we’ve never seen before, at least in modern day,” Simakov said.
Sources
Photo credits: Longest-ever Bull Run comes to an end in US/ Asian stocks crash/ IANS/ OrissaPOST/ Public Domain CCO; What's The Risk Of A Market Crash In 2020?/Spencer Platt/Getty Images/ Public Domain CCO; Maximillian Tortoriello Photography; Russia Will Beat Saudi Arabia In This Oil Price War/ Alex Halada/ Getty Images/ Public Domain CCO; Huge Swings Send U.S. Futures to Volatility Limit for Second Day/ Sarah Ponczek and Heejin Kim/ Bloomberg/ Public Domain CCO