Here’s What You Should Know About the Stock Market Tanking
Why did the stock market tank? Should you be concerned about your investments?
Wall Street trading halted twice this week after a slump in oil prices and the spread of the coronavirus increased worries about a global recession.
The S&P 500 fell 7% to its lowest since June 2019, triggering a 15-minute cutout, an automatic response that was put in place after the 2008 financial crisis. The S&P, along with the Nasdaq Composite and the Dow Jones Industrial Average, is in bear market territory. This means these three main indices are in a 20% decline from their 52-week high.
What Caused the Stock Market to Tank?
There were two main reasons for the steep declines. The first involves energy prices falling after Saudi Arabia started an oil price war with Russia. The second is the fact that the coronavirus continues to spread across the world. This has caused a significant impact on the global economy as factories close, workers call in sick and travelers cancel trips to Europe and Asia.
1. Oil Prices Slump After Saudi Arabia Increases Production
Saudi Arabia, which is the world's biggest exporter of oil, wanted Russia and the rest of the Organization of the Petroleum Exporting Countries (OPEC) to cut oil production to support crude prices since the coronavirus outbreak has dramatically disrupted global economic activity.
Russia backed out of the agreement, prompting Saudi Arabia to raise production and offer its crude at a steep discount in an attempt to punish Russia for abandoning the OPEC alliance.
As a result, crude oil futures fell almost 30% in the biggest one-day fall since the early 1990s Gulf War. Brent oil, the international benchmark of oil prices, was as low as $31.02 a barrel. West Texas Intermediate, the U.S. benchmark, fell to $27.71 a barrel.
The fall in crude oil prices caused the S&P 500 Energy index to slump to its lowest level since August 2004. The stock price of major oil producer Exxon Mobil fell to its lowest level since 2005, and Chevron stock declined to its lowest price since 2015.
2. Coronavirus Spreads Fear on Wall Street
We've seen plenty of volatility on Wall Street over the last few weeks due to concerns that the spread of the coronavirus could completely halt economic activity in major markets like China. Many worry that the virus could soon take hold in the United States too. U.S. President Donald Trump banned all travel from Europe to the U.S. in the hopes of containing the pandemic.
The virus continues to spread across the globe, even as governments have quarantined entire regions and forbidden travel to high-risk areas.
Italy locked down its northern region near Milan, blocking 16 million people from leaving the area in an attempt to keep the virus from spreading across Europe. China's economy remains at a standstill as well. Even so, Chinese officials reopened schools on Monday due to a falling in the number of cases of the virus. In the U.S., the number of confirmed cases rose to about 600.
While the White House administration has rushed to try to contain the outbreak, U.S. President Donald Trump has downplayed the impact of the virus. On Monday, Trump tweeted that Saudi Arabia and Russia's recent spat and “the Fake News… is the reason for the market drop!”
He also tweeted that the last year's flu caused more deaths than the coronavirus and that “Nothing is shut down, life & the economy go on.”
The World Health Organization says that the fatality rate of the novel coronavirus is 3.4% and has declared it a pandemic. That's compared to a less than 1% fatality rate for the seasonal flu. It's likely that the coronavirus fatality rate could be lower if more people get sick, but it's too soon to know for sure.
The virus, known as COVID-19, has symptoms similar to the flu. Like influenza, the older population and people with auto-immune diseases are the most at risk. However, there is no vaccination for the virus, and COVID-19 may be spread by droplets in the air, increasing the risk of infection.
What Does This Mean for Your Investments?
While the stock market drop isn't good in the short term, there are some sectors to keep in mind if you're hoping to make a profit from the drops in the stock market.
Retailers Walmart and Dollar Tree were among the few stocks in the green on Monday, as consumers rushed to stock up on supplies in the event of a significant coronavirus breakout in the U.S. Healthcare stocks could also benefit in the long term, as scientists rush to find a vaccination.
Tourism and travel industry stocks are the biggest hit from coronavirus fears. The airline industry is expected to lose about $113 billion as a result of travel restrictions to Asia and Europe. If you're looking to invest in the long term, now could be an excellent time to buy stocks, although the risk that stocks fall even more remains high.
If you're unsure about individual stocks, you can invest in exchange-traded funds (ETFs) like the Health Care Select Sector SPDR Fund (XLV) and Vanguard Health Care ETF (VHT) or the SPDR S&P Transportation ETF (XTN).
Other investment options include investing in safer assets like metals. If you want to invest in gold, you can invest in gold ETFs like the SPDR Gold Trust (GLD) and iShares Gold Trust (IAU). You can also hold on to your cash and put it in a high-yield savings account or a certificate of deposit offered by banks.
While the coronavirus remains a concern and there are more questions than answers, stay focused on the long term. You may need to make adjustments to your investments in the short term, but remember that there is a lot we still don't know and the pandemic, and bear market, will eventually pass.