Understanding the PH Stock Market Crash: Why We Shouldn’t Worry About Falling Markets
While the Philippine Stock Exchange Index (PSEi) has been slowly recovering in the past few days, there’s no doubt that it took a huge beating last March 19. During that day, the PSEi hit a price level way below the 5000 mark (somewhere in the 4600 level). So anyone who bought stocks when the index was at its 7000 or 6000 mark would have lost quite a bundle right now (depending on which stocks you bought)
But what does this all mean? Does it mean we’re in bad shape as an economy? What can we as traders and ordinary citizens do in this type of crisis? We’ll answer all of those things in this article and we’ll explain why you shouldn’t worry too much.
So let’s begin.
The Common Perception of the Stock Market
Now, when citizens read news about the stock market crashing or the index falling below X level, the common misconception that they’d usually have is that the economy is doing bad.
And that’s totally valid because not many people invest in the stock market and therefore don’t know the dynamics of the game. It’s fairly reasonable to think that if the economy is doing well, then companies will also do well hence the market index improving over time. That’s why most people panic whenever they see news about the stock market crashing.
This kind of news would incite panic on either two kinds of people: those who have invested in the stock market but can’t take losses, or those who don’t invest but assume that it will affect the economy and their lifestyles.
With that in mind, we’re going to shed some light on the subject. Numerous studies have been made on the relationship between the economy and the stock market. These studies have shown that there is no direct relationship between GDP growth and stock market returns.
In other words, the movement of the stock market isn’t dependent on the economic situation! Rather, the stock market just shows the mood of the investors inside the economy or the SENTIMENT.
How Does Sentiment Affect the Stock Market?
First of all, the stock market works on a concept known as Supply and Demand. For instance, if there is a huge demand for Stock A at a X price, buyers will come in and buy the stock at X price, further pushing the value/price of the stock up.
Supply and Demand is driven by the Sentiment of the investors of a stock. So if an investor feels that a stock will likely go up, he or she will wait until that stock hits a certain price then buy the stock. After gaining some profit, the investor will then sell off the stock.
Now, there are a few other factors that may influence movement of an individual stock but to keep things short, we’ll only talk about Supply and Demand based on Sentiment or Emotions because this is the main factor that affects the Index.
What Does It Mean for the PSEi?
So now that we know that the stock market doesn’t represent the health of the economy, what does the crash mean? Here are a few points to ponder on:
A Huge Number of People Sold Their Stocks
The reason for this is because investors were hoarding money avid the Covid-19 concerns– especially during the lockdown. Most investors want to keep their risk exposure low during these types of crises which is why a lot of them rushed to sell their stocks. Also, it pays to have cold cash on hand in the event of buying food to survive the lockdown. This sign indicates the presence of fear.
Bargain Hunters Came In
It’s interesting to note that the PSEi did recover a bit after reaching a low level. That’s because bargain hunters and long term investors started buying stocks at these low prices. Somehow, that activity allowed the PSEi to recover and go a little higher. This sign indicates the presence of greed since prices are so much lower now.
Sell-Offs May Continue
Since the Covid-19 pandemic is what sparked the drop in the PSEi (and other worldly markets) in the first place, there is a pretty big possibility that the sell-offs will continue until the panic is over. This sign indicates that the fear comes from the Covid-19 and that the pandemic has sparked the need to hoard cash in the event that panic buying continues and that buying a lot of rations may be needed.
What Should We Do When this Happens?
Whether or not you do invest in the stock market, it’s always good to know about these kinds of news because it will give you an idea of what to do with your money in this kind of situation. Here are a few ideas:
Wait for the Stocks to Bottom
First, you can wait for the stocks to reach a much lower level before you start to buy again. Now, it is pretty impossible to predict exactly when the prices of stocks will bottom but technical analysis can help you determine high probability levels to trade at.
Trade the Forex Market
The beauty of the Forex Market lies in the fact that you can earn from both a bull and a bear market. So if an economy goes down, you can actually short it and earn some profits. The catch is, you need to learn how to trade properly and develop a good risk management strategy in order to make money. That said, it’s best you learn while you’re still in home quarantine.
Learn About Trading Gold
Gold has always been a great safe haven because it’s liquid and tangible. It also can hold it’s own when other markets and economies are not doing well. But in order to learn how to trade Gold, you need to first understand the fundamentals of Forex trading as they are all related. When you start trading the Forex market, you can also trade the Gold Spot (XAU/USD).
Should You Worry?
The short answer to that is no. Don’t worry because a stock market crash is not an indication of further economic problems. It’s just an indicator that investors are on their risk-off modes and fear for their money.
On a lighter note, the market crash actually gives us room for more opportunities. With a crash like this, you have the opportunity to buy stocks at lower prices and also learn more about other financial markets on a holistic point of view while making money.
If you want to expand your knowledge on the financial markets and learn how to trade the Forex and Commodities market, allow us to invite you to join our FREE introductory Online Forex Seminar. Just click on the “Register Now” button below to save your slot.