Why Do Stocks Keep Crashing?
The stock market is crashing, and it is no longer much fun for investors. This is basically a time for panic for investors who are faint-hearted.
The question is, what is going on in the stock market? What are the next steps an investor needs to take in these trying times? In this blog, I will be sharing my thoughts from all my experience in the stock market as to whether we should be panicking, buying, or selling.
To solve any uncertainties concerning where to begin on your journey as a young investor in the stock market, I have a solution for you. In my blog captioned, When Researching Investment Targets Avoid These 5 Things you will find the answer to this question.
Here are the reasons why stocks keep crashing.
I strongly believe that the stock market runs on stimulus, and if this stimulus is removed, stock market prices will begin to fall again.
The stimulus bill is majorly affected by the U.S government, and they may have plans to pass this bill after the election. I have no idea when, but I believe the bill will be passed.
With stimulus, the big companies keep getting high profits and positive numbers in terms of revenue despite all the uncertainties and unemployment problems we are currently facing. The government may have plans to print more money to save the situation because providing more stimulus and printing more money may be the only card left for the government to play.
Even influential men in the economies of the world today are asking for a stimulus to help struggling economies and families all over. I also agree that the stimulus should be put in place to avoid more economic problems.
Like I said before, I am not one for politics, and I strongly believe it should not stand in the way of economic progress and stability. Passing the stimulus deal is somewhat political, and it should not be.
The aim is to help the lives of the people and even strengthen an already weakening economy.
The Walmart CEO is one of the influential people who are calling for a stimulus deal to be passed. There are wealthy families, and there are also struggling families. In fact, the struggling families are way more than wealthy families, so it is logical to believe that passing a stimulus deal will do well for the greater public.
We cannot continue to lower interest rates at this time because they are already at an all-time low. Even though printing more money may have its own economic disadvantages, it may be the only way to save this economy right now.
Once we have made it through these trying times, we can now focus our attention on stabilizing the economy. There is also the risk of prices of stocks and other items going higher, which may lead to inflation. So, until the bill is passed, the stock market will continue to downtrend.
Ray Dalio is one of the top investors in the world. He already senses that the stimuli bill will be passed, so he is choosing to expose his portfolio to more gold. He is doing it to hedge against the printing of more cash and the provision of more stimuli.
Spike in the illness cases yet again
Some people are suspecting that we are entering the second wave of the coronavirus pandemic. We are experiencing record highs in cases recently due to the spike in the illness cases.
For instance, France and Germany are some of the countries that are ready to announce further restrictions to determine the severity of lockdowns. Germany, in particular, is moving to impose a make-shift lockdown to last a month, and this lockdown will affect many areas.
They are doing it in a bid to prevent hospitals from being overwhelmed. France has also done the same.
The truth is the lockdown has a direct negative impact on the economy, and with the way things are going, we might be experiencing another major lockdown that will affect the economies of the world just as badly as the first lockdown.
I do not have any political interests, and this is certainly not a blog that wants to discuss politics, but here is one thing you need to know: The American economy is one of the strongest in the world. Donald Trump is the sitting president, and he has made it clear that he will not be locking down the economy if he gets re-elected.
His opponent, Joe Biden, has promised to listen to the experts, and he has insisted that if experts say they want to lock down the economy, that is exactly what he will do. These uncertainties and predictions are some of the reasons for the massive sell-out we are experiencing in the stock market today.
With all these speculations and the recent spike in the coronavirus cases, people will start practicing self-isolation again, even if the economy is not shut down, and we know what that will do to the economy.
I believe it is not something good. Should we talk about the travel sector? People will definitely be less willing to travel, and this is also affecting the tourism and hotel business. Most of these businesses are going under, and the ones that went down initially are still trying to find their feet.
Not everyone is scared of the present health situation in the world, and some people will be willing to take risks. However, if the majority are not interested in participating in normal economic activities, surely the economy will suffer.
Did you know that despite what is happening in the world right now, some companies are actually benefiting from the chaos? Microsoft is one of those companies. They have reported very high earnings over the past quarter.
It is also surprising that despite the positive financial earnings, the stock market prices keep falling by the day. This may be largely due to the fact that most people are selling off their stocks, taking their profits, cutting their losses, and are getting out of the market as fast as they can.
The current S&P 500 PE ratio is high right now, and it has only reached this high figure just twice in history. The first was when we had the internet bubble sometime in the 2000s, and the second time was when we had a financial crisis back in 2008.
This has made things more expensive, and high-tech companies are no exception.
Another company we should look at is Apple Inc. Their price to book ratio is at a high. In fact, it has been over ten years since it has been this high. This just emphasizes the fact that tech stocks are very high at this point in time.
Now that we have extensively discussed the two major reasons for the dip in stock market prices, the question now is, what do I think can be done to salvage the situation?
Well, I am not selling any stocks right now. This is because all the stocks in my portfolio have their function. I do not invest in stocks without doing any strong background checks, so any stock I buy has good prospects.
With all my experience and research, I am always bullish on the prospects of my stock in the long term. I cannot sell the stocks, knowing what the future holds. Instead, I am trying to build a watch list of all the future stocks I want to own. I have started my research, and I am doing all my analysis to make the right choices.
With the right conditions, I will execute my plans and wait for a positive outcome. So, instead of panic buying and selling, I am preparing ahead of time. All the preparations I am making will make it easier to grab any opportunity that comes my way.
It is really scary to see the volatility of the stock market right now. But, if you have enough information on the kinds of stocks you own and wish to own, you will see these uncertainties as great buying opportunities. If you believe the companies will do well in the future, there is nothing to worry about.
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Recommended books for further reading:
- Intelligent Investor – Benjamin Graham
- Rich Dad’s Guide to Investing – Robert T Kiyosaki
- Money: Know More, Make More, Give More – Rob Moore
- Cash Flow Quadrant
- How to Make Money in Stocks: A Winning System In Good Times And Bad