This year, the stock market crash of 2020 has hit the world hard. In order to try and moderate it, big firms have bought monstrous amounts of stocks in an attempt to avoid panic selling. In an unprecedented turn of events, stock markets were halted several times in response to the coronavirus emergency. Despite of that, all major indexes continued to see major losses – a crash was not to be avoided.
What Constitutes a Stock Market Crash?
A stock market crash is a point at which a major cross-section of a stock market faces a quick and unexpected dramatic drop within a day or several days. By and large, a two-digit percentage drop in a stock market index, when occurring within a few days, is considered a stock exchange crash.
Common Causes of the Market Crashing
Common causes of a stock exchange crash are financial bubbles, long-lasting bull markets and excessive optimism in the market, large corporate hacks, wars, changes in government laws and guidelines, and natural disasters within thriving economic areas. They are by and large followed by panic selling and can promptly lead to downturns, bear markets, and recessions.
The Cause of the Stock Market Crash of 2020
The most prominent impending danger to the economy this year has been the same thing that caused the 2020 crash in the first place: the Covid-19 pandemic.
Right now, investors are worried about the possibility of a second stock market crash that might be triggered by the discovery of a new strain of the coronavirus. What’s more, the impending Brexit – the details of which are still painfully unclear but the results of which are already to be felt in the UK’s clogged-up ports – comes with a heightened uncertainty that could result in yet another crash.
Can the Crash Result in Recession?
A stock or financial market crash decreases traders’ trust in the economy and, moreover, results in major losses of paper wealth. Traders resort to auctioning off their assets at negligible prices. In the absence of certainty, speculators at the same time slow down their acquisition, or pause it altogether. With the reduced number of active traders and falling share prices, it becomes more challenging for registered companies to raise capital for expansion.
Organisations that were previously fit as a fiddle can resort to layoffs and contractions, bringing about a downturn in the economy. As this downturn continues over time, it can lead to a recession.
In conclusion, a stock exchange crash is usually an early indicator of a recession – in 2020, for instance, the stock market started to drop off in February, but the true spike in unemployment and economic downturn was yet to follow.
How Will We Feel the Effects in 2021?
Whether or not there will be a second stock market crash in 2020, the damage to the economy has already been done. According to economic forecasts from PWC and KPMG, we can expect to see unemployment rise in 2021, rising from 5.9% in 2020 to 8.4% in 2021. These numbers are calculated in the assumption that a coronavirus vaccine is approved (which it already has been) and the UK agrees a deal with the EU (pending).
Base interest rates, however, will stay at 0.1% or under, which will help to support the market. Inflation is expected to stay well below 2%, which should keep the purchasing power of the GBP pretty stable.