Market declines? An opportunity that doesn’t happen often.

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April 8, 2020

As coronavirus spirals into a worldwide pandemic, the shockwaves have plunged global stock markets into disarray. We have seen company stocks and shares topple  in value with some even ceasing to exist all together.  

It’s widely accepted that we are now looking at another financial recession as many non-essential businesses such as restaurants, pubs and coffee shops have been required to shut their doors. Flights in and out of countries have been grounded and small, independent businesses have been crushed under the pressure of overburdened supply chains, staff shortages and new restrictions on face to face trading.

However, many investors are seeing this as an opportunity. A way to get their foot into the market with a timely entrance or reshuffling of their portfolios. 

In this blog post will be covering these topics: 

  • What is market correction
  • Key correction events of the past
  • How to make the most of the recession climate

What is market correction?

A market correction is believed to happen when the market has been overvalued. In such circumstances, an event such as a global health crisis or a financial collapse caused by systemic instabilities, can catalyse the market and cause a crash.

This kind of correction is defined as being a 10% or more drop in value of a company's share price or complete stock index. In extreme circumstances, market corrections can turn into ‘bear markets’ where the national, regional or even global economy shrinks by more than 20%. We have seen an excess of this during Q1 2020.

Key market correction events

A key example of a market correction is the Great Depression, which began in 1929. The Great Depression was a worldwide economic depression and is commonly used as an example for how deeply the global market can go into decline. 

It is thought that The Great Depression started in the United States after a major fall in stock prices that began around September 4, 1929. This caused the stock market to crash and sent Wall Street into panic. 

This had a knock on effect when it came to investors and workers. Many investors dropped off the map and large companies laid off existing staff. Over the next few years, people spent less and less money, meaning that investment dropped. This caused steep declines in industrial output and employment. By 1933, the Great Depression had reached its lowest point. 

For the market to recover from this, it took four years and five months, which was considered extremely fast. 

Another key example is the infamous Black Monday

The stock market crash in 1987, better known as Black Monday was the day where U.S markets saw the value of stocks fall more than 20% in one day. 

The fall of the market was down to two driving forces. 

Firstly, it could have been triggered by computer programme driven trading models, which were following a portfolio insurance strategy.

A portfolio insurance strategy is a type of hedging strategy. It is developed to limit the losses of the investor by ensuring they won’t have to sell the stocks themselves if they decline in index. This strategy involves selling futures of a stock index during periods of price declines.

The second driving force behind Black Monday, could be due to investors panicking. If there is a prescient that if a stock is going to drop in price, traders and investors will pull out their capital. 

This can have a domino effect. Meaning that one large investor pulling out can send a message of uncertainty and doubt, causing many more to follow suit. 

However, the market recovered massively. Five years after Black Monday, the stock markets in the UK, US and Europe were rising by as much as 15% a year!

The dot-com bubble is another example. However, this was an instance of the stock market becoming overvalued. The dot-com bubble was caused by excessive speculation in the internet stock market. People were purchasing stocks in companies such Alphabet, which own Google, at an unsustainable pace. 

In the late 1990s, internet stocks saw a period of massive, unjustifiable growth. This led to the dot-com bubble popping. 

This is a perfect example of the market correcting itself. Internet-related stocks were recognised as being heavily overvalued. Websites weren’t pulling in enough cash flow to be liquid enough for investors to pull their capital out of the companies. Put simply, websites weren’t making enough money, which meant investors that had put their money into the stocks wouldn’t see a return on their investment.

It is quite easy to say that the stocks surrounding technology have recovered extremely well and it has become a must for every individual. FAANG, better known as Facebook, Amazon, Apple, Netflix and Google have all helped to drive the market up and reach new heights.

Finally, the financial crash of 2008. This primarily involved mortgages and the banking system that encompassed them.

In 2008, people who wanted to purchase a house along with a mortgage could find themselves doing so with little complications. A year before, in 2007, subprime was introduced to lower-income individuals who were looking to purchase a new home. 

A subprime mortgage is the provision of loans to people who may have difficulty maintaining the repayment schedule. This was appealing to many and thus thousands applied and were consequently accepted regardless of their financial situation.

Within a year, many individuals couldn’t reach their mortgage payment deadlines. This caused the mortgage backed securities, which were linked to subprime loans, to become toxic as they were valueless. 

Institutions that owned these mortgages panic sold them into the market resulting in the market crashing. 

Following the Financial Crash, it took about 6 years for prices to recover to their previous all-time highs.

How to make the most of the recession climate

Due to the coronavirus, the stock market is seeing it’s lowest index prices since the 2008 financial crisis. 

This means we could be heading towards a recession or even a depression. 

However, this could be the opportunity that investors are looking for. If we look back at all of the declines in the market, one thing is clear. What goes down, must come back up. 

Many indexes are their lowest point right now, which means they are extremely affordable to purchase. 

A prime example of this is that over the last month the Standard & Poor 500 (GSPC) fell over 20% and is continuing to plummet as the pandemic has escalated. At its highest point, it was worth $3,393.52. As of this day, you can purchase a share for $2,541.47. 

This is a new investor's dream. They can purchase a plethora of different stocks for a fraction of the price they will eventually rise too. 

The stock market will climb back up in value and now is the best time to purchase low-priced shares. 

Here at Ai investment, we specialise in helping you grow your investment portfolio. We can offer you guidance and advise you when it comes to buying shares. Now is the prime time, get in contact with us today.