covid-19 market crash

Should Investors Fear A Second Market Crash?

The 2020 stock market crash was as exponential as it was sudden, with huge entities such as the FTSE 100 crashing by a third during the first quarter.

After hitting a peak of 7,674 in mid-January, this market declined to below the 5,000 barrier on March 23rd as the coronavirus outbreak evolved into a global pandemic.

Interestingly, September also saw the UK stock market decline by more than 3%, falling to 5,800 after enjoying a rebound during the second and third financial quarters.

In this post, we’ll ask whether another crash may be just around the corner, while considering how this may impact on the forex market.

Why Markets Crash – And Could Another Steep Decline be Just Around the Corner?

In simple terms, a stock market crash is when an index drops severely in a matter of days during trading. This includes indexes such as the aforementioned FTSE 100, along with global entities like the Dow Jones Industrial Average and the Nasdaq 100.

A crash tends to be more sudden than a stock market correction, which is typically when the market falls 10% from a 52-week high over the period of days, weeks or even months.

Market crashes also tend to be triggered by sudden and seismic events, with this borne out perfectly by the recent coronavirus outbreak. Make no mistake; the March market crash was triggered by the transition of Covid-19 into a full-scale global pandemic, which sent the markets reeling and stock prices plunging.

Interestingly, this also explains why a growing number of investors are anticipating a further crash, with a so-called “second wave” of infections seemingly imminent and local lockdown measures being imposed in countries across the globe.

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This will be alarming news for some investors (particularly those who are risk-averse in their nature), largely because many will have existing stock holdings that may decline in value and ultimately become harder to sell for a profit.

Does a Market Crash Also Create Opportunities for Investors?

Of course, it didn’t help that this followed an extended bull market, which usually precedes a stock market crash or collapse. Interestingly, this also creates opportunities for investors, by devaluing blue-chip and premium stocks that are likely to rebound quickly and significantly as the economic climate improves.

The 2020 stock market crash definitely threw up some tremendous bargains amongst all FTSE 100 and FTSE 250 shares, particularly with some of the world’s high value tech stocks experiencing a sharp decline despite their immense resources and growth potential.

Promising mid-cap stocks also offer immense potential during periods of market fluctuation, as they may also benefit from short-term devaluation while offering even greater growth potential over an extended period of time.

There’s also an intriguing link between stock trading and other markets, especially the foreign exchange. This means that stock and equity price movements can impact directly on forex trading, creating an additional and insightful indicator for investors to consider when making decisions.

To understand this further, let’s look at the correlation between the Japanese Nikkei and the popular USD/JPY pairing.

The former is a strong reflection of the economic growth of the country, and in instances where the Nikkei stock market rallies, we tend to see the yen strengthen as the USD/JPY declines in value.

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The reverse is also true, so this is something to keep in mind when trading stocks and forex in the current climate.

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