Since the entrance of the Covid-19 into the US, the stock market has been in a rollercoaster. Shuffling between the reds and greens. For the first time after a long bull market history, the stock market plunged into bear territory. Company stocks were down their lowest over the past months—some industries more severe than the others. The effect of coronavirus pandemic and US economic and government activities have partly contributed to the stock market plummet as well as panic selling amongst investors.
What is Panic Selling?
Panic selling is an intense act of selling investments or securities in large numbers which in turn, causes a sharp decline in security prices. In the long run, it affects the overall performance of the stock market and the economy at large. Panic selling is “unhealthy” to the stock market because investors who want to escape a stock market crash or an economic decline sell their investments lower than the buying price. This type of selling poses a threat to the stock market because investors sell in fear rather than logically evaluating economic fundamentals involved.
What Causes Investment Panic?
There are a whole lot of financial and economic reasons that can create fear among investors such as a recession or market crash. Majorly, the causes of panic selling can be said to be high market speculation, economic instability (recession), and political issues. A panic usually happens when stocks begin to plummet and stock market indexes dropping below average points. Once investors begin panic selling out of fear for whatever reasons the market becomes flooded with a lot of securities or commodities sold at lower prices.
Since the 1930s, the US economy has experienced quite a few rough patches such as the Great Depression of 1930, the Great Recession of the 2000s, and the Financial Crisis of 2008-09. All of these, triggered by different reasons all arriving at the same conclusion—an economic decline. Many global economies are structured in such a way that an issue in one sector of the economy can create a ripple across other sectors of the economy.
For example, during the 1930s Great Depression “many economists believed that the major cause of the Great Depression was the stock market crash, however, some others disputed that fact seeing the stock market crash as an effect rather than a cause.” Prior to the depression, the US economy had experienced significant growth caused by the emergence of new technologies. Between 1927 and 1929 industrial production jumped 25%, until October 1929 when the decline started. As a result of the long-lasting decline which affected all other aspects of the economy many investors were driven into panic selling, thereby, causing a sharp decline in the market.
Another example can be seen in the 2011 gold price plunge. The value of gold does not necessarily surge in an economic decline, yet, many investors invest in gold as a strategic move to hedge against inflation during an economic decline. In the second quarter of 2011, the price of gold jumped 22.69% reaching an all-time peak of $1907. It lasted only a short while as the price of gold fell $101.90, or 5,9% in daily trading making it the first $100 daily price drop since 1980. In spite of the increase in gold prices, the global economic growth slowed down and fear of market uncertainties about the price fall eventually led to panic selling amongst investors which caused gold prices to plummet.
The most recent example is the on-going Covid-19 pandemic which has not only hit the US economy by the global economy as well. With the Asian markets bearing the heat the most. The chances of panic selling remain high as the rate of panic shopping increases. Unlike other economic declines of the past, the uncertainties surrounding the pandemic are numerous. No matter the amount of economic stimulus deployed to sustain the economy, many investors will still go ahead with panic shopping as the overall answer for economic sustenance rests on the cure for the coronavirus.
Rick Kahler, founder of the Kahler Financial Group, Rapid City is of the opinion that: “there’s absolutely a correlation between hoarding and selling out [of the market].” This opinion is built on the fact that when the markets plunge some people fall to cash and in the case of a pandemic many people would want to stock up. Both cases correlate to the fact that many people don’t do so well under pressure and would rather gather up what they can than lose everything.
In this case, the coronavirus may not necessarily be a major cause for panic selling, but the fear attached to the uncertainties surrounding the pandemic. This fear leads to hoarding. Whether of goods, commodities, or securities. According to Dan Pallesen, chief investor at Keystone Wealth Partners, the human brain is structured simultaneously complex yet sample with a primary goal of keeping us alive. Therefore, it is no surprise that when a person’s “survival mechanism” is threatened by external factors, it is a natural response to protect oneself. This is a safety mindset according to Pallesen. The coronavirus pandemic is one of such triggers that propels us to the safety mindset.
How Can Investors Prevent Panic Selling?
This safety mindset can be best applied to many facets of life, but for investors more would be required as the best advice for investors in such a time as this is to remain calm and follow through till the end. The markets are in extreme volatility and to avoid falling of stock prices investors must remain calm—at least for long term investors.
The fact still remains that regardless of the plunge and losses reported in the stock market and the current economic situation at hand, all the issues would eventually pass away and the economy restored. Therefore, long term investors who would want to reap the most of their investments would need to “sit it out” until the whole phase is over.