We all heard the news about the spread of the coronal virus… and then came the news of the affect on the stock market. But why?
The first thing to remember is that the stock market is built not of stocks but people – lots of people. Not only is the stock market built of people but the businesses that it invests in are also built of people. And people can be, well, unpredictable.
If you remember the definition of a “run on a bank” – where several people decide to go take it out their deposits from a bank because they believe (whether true or not) that the bank is in trouble. All at the same time. This kind of behavior can make an individual bank fail. This happened quite a bit in the early 20th Century until regulations required that banks hold more of their deposits in Federal Banks.
So, then the stock market ups and downs can be seen in much the same way. Lots of people get wind of a particular stock for a particular company being a good deal and purchase its stock driving the price up. That can be for a number of reasons, way too many to discuss here but can include things like a positive financial projection, the hiring of a CEO or leader that has a proven track record, the introduction of a new product that lots of people believe will sell well, etc.
A stock market crash is a big sell off of stocks in one day. A correction is a sell off of stock that can happen in one day or over a period of time, possibly after an overly enthusiastic period of buying.
So, what has happened to the market with the surfacing of the effects of the Coronavirus on China and its economy is, not exactly either. It is not quite a crash, but a correction of sorts but one in which stockholders are both reacting to what has happened – we have seen a slow down in Chinese productivity because of workers in China unable to work – and to what may happen – more people in China may get infected and all over the world.
While it is painful to see the value of your holdings go down, despite what it might feel like at the moment, it is not the end of the world. Markets generally correct themselves after a downturn in a few months. So, if you don’t absolutely need to sell your stock right now, don’t. Hold on and slowly we will see the market return to normal.