We are all familiar with the nature of investments. The value of investments inevitably fluctuates at one point or another. This is the scenario that we are all familiar with– the up and down nature of investments.
On the other hand, a market sell-off involves heavy selling of individual securities, including bonds, stocks, currencies and commodities at rapidly declining prices. It goes beyond the daily peak and troughs of the market prices. This is why skills like being able to predict or identify the happening of a sell-off is a great resource. Signals always present themselves in different forms, so there needs to be a readiness to analyze a lot of indicators.
The key to sell-offs are unexpected events. The term used for this is Black Swan. Black swan events are impossible to predict because of the extreme rarity in occurrence, hence the importance of always assuming that a black swan is a possibility. It has to be taken into consideration always because of its damaging consequences.
If quarterly reports of a company show negative results, that would trigger mass selling for that company or the broader market. If black swan occurs, the direction of the market changes massively. For the current global market, the black swan is the COVID-19 or novel coronavirus outbreak. This a global phenomenon that no one saw coming, and now wreaks havoc on the stock market. It has caused a lot of fear and panic to the public, which resulted in the fall of oil prices.
The impact of the coronavirus outbreak is felt globally. Industries and businesses feel the harsh blow to the economy. Oil prices have reached an 18-month low with just $50 for every barrel. The aviation industry has been hit hard, which in effect hits back on the oil sector. Because of the travel bans, cancelled populous events and recommendations to stay indoors as much as possible, demand for flight travels have gone down.
China is the second highest oil consumer in the world, so the heavy impact of cancelled airline flights cannot be brushed off as a trough that the market can easily bounce back from. This black swan is not just an excuse to sell stocks but this time, it poses the biggest threat in the corporate world.
Will the attitude of selling now and asking questions later still be the standard approach amidst this outbreak? Even foreign exchange markets have felt the blow of the coronavirus hysteria. The Australian, Canadian and New Zealand dollars have dropped dramatically. This shows the dependence of these countries on China, which is suffering its weakest economy in almost 30 years.
The current global economy is very different from how things were when SARS happened 17 years ago. The markets were then recovering from the bursting of the tech bubble. The United States and the United Kingdom have enjoyed a good decade run.
Sometime in the future, there will be a time to buy. The wait is excruciating and drives the investors to a lot of “what ifs”. Emotions are high, but the fear of being caught in a downdraft may cause traders to stay in the sidelines. The sell-offs are reminders for investors to reassess their holdings. Should you risk it or just pack up and head to the sidelines at this point in time?