News, Culture & Society

Why Stock Prices Are Dropping Today

Since March, stock prices have been low. The outbreak of COVID-19 causes uncertainty in all markets. Today, over 200 countries are affected, including Nigeria. It seems the barrage of alarming news is neverending. Stock prices are down as coronavirus is wreaking havoc on all continents. However, it is not the only reason.

Given the present situation, any forecasts look questionable. The world is still adapting to the new reality and our lives may never be the same. Should you buy stocks today while they are cheap? This is the question bothering many traders and investors. To identify the best course of action, it is necessary to examine the root cause first.

The Emotional Aspect

So far, many stocks have plunged. This clearly reflects an emotional reaction to the negative news reports. Since the pandemic was declared in March, the downfall has been spectacular. After all, shareholders are also confined to their homes like everyone else.

However, the market had already started slowing down earlier. The Dow Jones Industrial Average (DJIA) showed negative dynamics – by Feb. 27, it had lost over 10% in comparison with two weeks prior. Investors were already affected by the trade wars between the US and China. The pandemic hit.

Affected by media coverage, many participants started short-selling. This behavior is predictable but not as rational as you may think. The market chaos is caused by panic, which is always temporary. Any trends in the market are temporary and prices are likely to return to their average. The only question is time. Therefore, selling assets immediately may not be the best idea. This could mean opportunity costs in the future.

Some investors stick to old-school strategies. They make sure their portfolio includes stocks following the formula “100 less the holder’s age.” This is a rule of thumb rather than a proven method. However, it can still provide solace in these desperate times. Sometimes, we just need patterns to stick to.

C.A.P.E.

Today, it is impossible to predict the future, even in the short-term scenario. What is obvious is that the market is cheaper than in late 2019. Thus, if you buy stocks through a trading platform, you can buy low. Here are a few stats to show the general movements.

Consider the valuation of the C.A.P.E. ratio for the S&P 500. It reflects how the actual stock price compares to the 10-year average of real earnings. In the first month of 2020, the value was 31 – the third-highest level ever. Now, the indicator shows 25.88. Although not the worst result, it is hardly spectacular. C.A.P.E has already had a long-term average of 17, which was seen as fairly positive. This means the present value was observed before.

The Best Strategy

The downtrend presents a favorable opportunity for stock trading online. Through an international broker like  FXTM, clients in South Africa and Nigeria may purchase stocks of the largest multinationals like Apple or Google. Virtual derivatives like CFDs allow profiting from price changes without ownership. A Contract for Difference linked to stocks may be traded like other instruments, but it does not require its holder to own actual shares.

At the moment, volatility is high. Investors are advised against impulsive decisions. Given the dire situation with lockdowns and closing down businesses, shareholders are likely to sell what they have. This is motivated by the desire to avoid even bigger losses. However, the strategy is not entirely reasonable due to the following conditions:

Prices may resume growth before the virus is officially contained;

  • Repeated entry and exit result in transaction charges and missed opportunities;
  • As a rule, investors who panic in crisis situations and exit the market incur the biggest losses;
  • The market is likely to see volatility throughout 2020.

Ten Years Ahead

The Guardian newspaper expects negative market conditions to linger for a decade. This is presented as a consequence of economic shutdowns and the emotional trauma caused. The present situation is compared to the Great Depression in the USA. Its effects on the collective consciousness were lasting.

As a result, investors and traders may be more risk-averse. This will keep the stock prices low. However, this still does not mean you should get rid of your assets. Instead, now could be a favorable moment to buy low.

To Conclude

Unfortunately for traders and investors, the future of the markets is still uncertain. The world is likely to witness volatility until the end of 2020. While prices are low, consumers may benefit from online stock trading, buying shares and CFDs. Short-selling is not advisable as the market usually returns to its average. Eventually, the stocks will grow again – it is the only thing that is certain.