Stock market crash – What you should do when markets panic
The start of 2021 saw big gains in the stock market, especially in the equity and tech sectors. The start of 2022 however is proving to be bleak for traders.
On January 24, the S&P 500 and the Nasdaq both finished their worst week since March 2020. Cryptocurrency prices have seen its biggest drop in months, and the Federal Reserve also announced it will be raising interest rates in an attempt to rein in surging inflation.
Today, we look at what is fueling the current stock market crash and share valuable advice for all traders.
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What’s fueling the crash?
As a week-long selloff that is pushed major indexes down intensifies, investment firms are warning clients the worst is still on the way as the Federal Reserve begins raising interest rates.
Key to the dip is the Federal Reserve panel meeting later in January. It’s expected that it will remove the liquidity that has supercharged growth stocks in recent years.
Experts also believe the US central bank will end its bond purchase programme and scale back its pandemic-relief stimulus. The Fed is expected to raise interest rates in March, the first time since 2020, and is already pricing in at least four rate hikes by the end of 2022.
The reason for the Fed’s decision is simple – rising inflation. Maintaining interest hikes will have escalating effects on inflation.
Higher borrowing costs and more attractive bond yields have had a devastating effect on tech stocks; the Nasdaq is down 12% and the S&P 500 8% so far in 2022.
Adding to market woes are concerns about a possible Russian attack on Ukraine. The US, UK, and NATO are considering sending support. Some countries have already sent aid. A conflict on the scale will have dire consequences for the market and the global economy.
Top advice for traders
Here are top tips all traders should follow during times of uncertainty:
- Stay calm even when markets panic
The crash of March 2020 sent markets into a free fall, yet mere months after the initial crash, global markets began to recover.
It’s easy to be caught up in the panic and join mass sell-offs that traditionally follow a crash. Traders who are able to maintain their composure during the initial panic of a market crash can capitalize on market volatility.
Stay calm, watch trends and implement proper risk-management strategies.
- Diversify your portfolio
Traders are warned to never put “all their eggs in one basket”; Diversifying your portfolio limits your risk and increases profit potential. Bitcoin reached a record high of $68,000 in 2021 yet by January 25 it’s down to $36 000. Similarly, gold has been struggling for the better part of 2021, yet in January it is seeing its biggest rally in a month. Assuming a trader had both these assets in their portfolio, the declining instrument could be offset by gains from the appreciating one.
From commodities to Index/Bond Funds, a diversified portfolio minimizes risks and reduces panic selling.
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- Markets are unpredictable, especially in the short term
All markets are unpredictable, it is the inherent volatility that creates trading opportunities. It’s all too easy to be caught up in bearish sentiment and attempting to perform some form of “damage control.” Markets however are cyclical; a short-term drop now could lead to long-term performance.
Developing a trading strategy, that you can stick with over the long term, will see much better results than trying to predict markets daily and react accordingly.
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- Volatility equals opportunity
As the markets crashed in 2020, some companies (e.g. Amazon, Zoom) not only managed to shake off the worst of the pandemic but ultimately thrived in a climate marred by the recession.
Gold traders are pushing as the dollar weakens and commodity markets such as coffee and sugar are seeing record high prices. It’s easy to focus on the negative and not see opportunities caused by volatility.
Spotting trends, predicting possible opportunities, and a diversified portfolio are key to trading profitability.
- Things can always get worse
The effects of those early pandemic-driven months of 2020 are still keenly felt by all. Many businesses are forever closed and some sectors, such as tourism, will take many more years to recover, if at all.
By 2021, the markets were booming, especially crypto and equities. Companies reported their highest profits yet in a decade and the world’s richest got richer.
In 2022, the market is experienced a serious crash but to many, it doesn’t come as a surprise; the Fed would have to raise interest rates sooner rather than later and countries are unwinding economic support.
There is no guarantee a trade will work out; portfolio diversification is key to minimizing your risk, especially when it comes to long-term investments. Recognizing when to stay or pull your capital out is key to staying in trading and making a success.
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