Decline of the Stock Market from Its All-Time Highs
On March 9, 2020, U.S. stock indices experienced the biggest point drop in their history, after the “Dow Jones” saw a historic decline in points, followed by two more record drops in the following days.
How Does the 2020 Crash Compare to Historical Financial Disasters?
Before the 2020 crash, stock indices reached their all-time highs on February 12. The stock market began to decline the following week, when the “Dow Jones” started to slowly decrease on February 20. On March 9, the “Dow Jones” fell by 2,013.76 points to 23,851.02, marking the worst single-day point drop for the “Dow Jones” in U.S. market history. On March 11, the “Dow Jones” declined by 20.3% from its peak recorded on February 12, prompting a market exodus and exceeding the 11-year bull market that began in March 2009.
Causes of the 2020 Crash
The 2020 crash occurred due to investor fears regarding the impact of the coronavirus pandemic, alongside a decline in oil prices and the potential for a recession in 2020. The consequences of the coronavirus pandemic caused investors to worry about the severity of the virus and its effect on the economy as a whole. The closure of many businesses and industries when countries implemented lockdown orders harmed multiple sectors of the economy, leading investors to anticipate layoffs, rising unemployment rates, and diminished purchasing power.
Effects of the 2020 Crash
Stock market crashes often lead to economic recessions in many cases, and this is particularly true when it coincides with a pandemic or an inverted yield curve. An inverted yield curve is an abnormal situation that occurs when the yield on short-term Treasury securities is higher than the yield on 10-year Treasury securities. This only happens when short-term risks outweigh risks in the distant future. The yield curve inversion occurred with the onset of the initial recession, which raised significant concern among investors. On March 9, 2020, investors demanded a higher yield for a one-month Treasury compared to a ten-year Treasury, reflecting their level of concern about the impact of the coronavirus.
How Investors Were Affected
When an economic recession occurs, it often results in panic among many individuals, leading them to sell their stocks to avoid losses. However, the rapid recovery that followed the stock market crash indicates that many investors continued to invest rather than sell during 2020 and 2021.
Measures to Shorten the Length of the Recession
Following the stock market crash in 2020, an economic recession ensued, but it was followed by a strong yet uneven recovery. During the administrations of Trump and Biden, the federal government enacted several laws to stimulate the economy, including targeted aid to specific sectors, cash assistance to taxpayers, increased social welfare, and rental assistance.
These measures reassured investors and led to further gains in the stock market. Investors were also encouraged by the development and distribution of multiple coronavirus vaccines, which began during the Trump administration.
Initially, vaccine-related privileges were limited to specific age or health status categories. However, in March 2021, President Biden instructed states and territories to make all adults eligible for vaccinations by May 1, 2021.
Despite the unprecedented driving forces behind the 2020 stock market crash, investor confidence remained high, driven by the availability of federal financial incentives and vaccine developments.
Source: https://www.thebalancemoney.com/fundamentals-of-the-2020-market-crash-4799950
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