The 2020 stock market crash continues. The leading market index the Dow Jones Industrial recently suffered its largest one-day plunge in history, losing 2,997 points on Monday to be down by a whopping 30% for the year to date. Stock markets across the globe have followed the Dow lower. This sees the S&P/TSX Composite falling by 26% to now officially be in a bear market. While some optimism has returned because of government stimulus, there are signs of further carnage ahead.
Further market losses ahead
Countries across the globe are rushing to close their borders and enact travel bans. Some have even locked-down cities and regions in response to coronavirus outbreaks. This is weighing heavily on economic activity and the outlook for stocks.
Based upon the experience of China and South Korea, there could be worse to come for the U.S., which is the world’s largest economy. Some medical experts are claiming that the slow response of the Trump administration to the pandemic has left the world’s third most populous country vulnerable. That sadly means the number of cases and casualties will continue to grow.
Any sharp spike in U.S. cases and fatalities will further spook an already extremely nervous Wall Street. That will trigger further market routs, causing stocks to fall.
Severe economic impact
The reasons for this are simple; the coronavirus pandemic has not only generated considerable fear but seen governments implement unprecedented measures to quell its spread. These include travel bans, restrictions on events, the closure of schools, universities, and many entertainment venues and greater calls for social isolation.
That has caused economic activity to decline sharply and could ultimately cause the economy to grind to a halt. While it is widely accepted that a recession will now occur in 2020, there are some pundits claiming that the coronavirus and the strategies being employed to contain it will trigger a depression. Some of the industries most vulnerable to those extraordinary measures include airlines, restaurants, and retailers.
Financial stimulus could fail
Don’t expect government economic stimulus packages to offer any short-term reprieve. If people are unable to leave their homes and travel their ability to consume is constrained causing sales to fall sharply. Business activity is also being limited to all but essential actions, further weighing on sales and inventories.
That means stimulus spending will be curtailed, no matter how much money governments add to the economy or reduce interest rates.
As a result, the next earnings season, for the first quarter of 2020, will be brutal.
Analysts expect that many companies, notably those dependent on international business and discretionary consumer spending, will report significant declines in earnings and even large losses. As those numbers are announced, stocks will plummet, cascading ever lower as the market digests the bad news. That will be exacerbated by reports indicating that the economies around the globe are slowing and even contracting.
This means there are further market downturns ahead. These could cause stocks to fall to lows not seen since the 2008 Great Recession.
What investors must understand
Nonetheless, ignore the sensational market headlines and the fear engulfing the stock market, and don’t panic. The short-term performance of the stock market is nearly impossible to predict, but one thing is certain: we know that over the long term that the value of stocks will keep growing.
This because economies, gross domestic product (GDP), and wealth across the globe keeps expanding. In 1970, Canada’s GDP was worth just under US$88 billion, since then it has grown almost 20-fold to US$1,741 billion by the end of 2019. During that period, there were numerous economic and geopolitical crises that caused stocks to plummet. These include the 1970s oil shocks, the 1987 Black Monday stock market crash, the 1997 Asian financial crisis, and the 2008 Great Recession.
Despite those events, the value of Canadian stocks has grown significantly over the last 50 years. By the end of 2019, the S&P/TSX Composite closed at 17,063.43 points, which is an almost 18-fold increase in value, or 1,701% gain, compared to the end of 1970. This underscores why investors need to keep a cool head, resist the urge to panic, and remain confident that regardless of the current carnage, stocks will perform strongly over the long term.
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Fool contributor Matt Smith has no position in any of the stocks mentioned.