With the coronavirus remaining a global health threat, several studies have shown that instant market corrections, like the one during the last week, shows that in the following weeks it tends to drive the markets to sharp gains.
A study showing a prior market decline of 10% or more, since 1990, has demonstrated that equities tend to bounce back up in the following weeks coming.
It is foreseeable that the gains tend to widen in a greater extent, as time passes after the five-day plunge elapses.
For example, in the wake of the 9/11 attacks, it has been observed that the S&P 500 gained 10.9% over two weeks after selling off. Further to that, those gains rose to 12.3% one month after the sell-off, and 19% after three months.
The Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite all fell more than 10% the previous week, with stocks having their biggest weekly declines since October 2008, and when the financial crisis occurred.
Last week’s selling appeared to derive from market fears regarding the coronavirus’s spread to the U.S.A and its potential to disrupt economic production. The World Health Organization (WHO) has confirmed that more than 90,000 people have been affected from the disease worldwide, and that nearly 3,600 people have died due to it as a result.
Strategists at JPMorgan, Citi and Goldman Sachs have mentioned over the weekend that there hasn’t been enough pain in the market yet to warrant relief.
Christian Mueller-Glissmann, equity strategist at Goldman Sachs, stated in a note: “While ‘buy the dip’ has been a successful strategy since the Global Financial Crisis, with equity drawdowns often reversing quickly, it might be more risky this time”. “With global growth still weak, the shock from the coronavirus outbreak lingering and less scope for monetary and fiscal easing, the risk of a more prolonged drawdown remains.”
Is this a huge opportunity after this crisis for a comeback?
Panicking and selling, not only locks in losses, but also puts investors at risk for missing out the market’s best days.
Looking back to data from 1930, the Bank of America acknowledged that, if an investor missed the “10 best days” of the S&P 500 from each decade, then the total returns would be just 91%, significantly below the 14% return for investors who held steady through the downturns.
The Bank esteemed this eye-popping stat while urging investors to “avoid panic selling,” and pointing out that the “best days generally follow the worst days for stocks.”
Noticing the Dow Jones Industrial Average, this pattern could be seen occurring this week. The 30-stock index reported big losses three days last week, however it had two record high substantial daily gains, in which ended the week with a 2.5% benefit.
Meanwhile, the stock market remains in correction territory, with all the major averages having a decline of more than 20% from their highs.
Most of the companies in the pharmaceutical industry are expected to spend/invest resources for research and development in order to win the battle between them, in which company will create the antivirus against the coronavirus. During this process, there may be a possibility of their stock prices to increase, but a considerable increase is expected to occur to the share price of the company that will invent an effective antivirus.
For investors who feel they have to do something during downturns, TD Ameritrade chief market strategist JJ Kinahan recommends to make only small moves. “The problem most people have is they think all, or none: think partials,” he said.
After the price deduction in most markets, and having the powerful tool of leverage, it seems a great opportunity to invest into the CFD market, as this will require less margin and exposure to hold onto the positions. With leverage, either to Buy or Sell into the market, means that you only have to deposit a small percentage of the notional value of the transaction. With Leverage it magnifies your exposure to the movement in the price of the underlined instrument, meaning that your potential gains or losses from trading products will be much higher than would be in the case if you did not use leverage. Leverage instruments carry significantly greater risk than non-leveraged instruments.
In today’s trading opening, the US Stock Indices fell more than 4.5% while the European Stock Indices (DAX 30, EURO Stoxx 50, CAC 40, IBEX 35) in today’s trading opening fell more than 6.5%, respectively. Crude Oil price fell more than 21% and from Friday’s close price at 41.56 per barrel is now at 32.65 per barrel.
Source : FXGM Investment Research Department / CNBC