This blog post is meant to answer the questions for friends and family that are not as plugged in or knowledgeable as traders and seasoned investors and wonder why the stock market is falling so fast in March of 2020.
- Stocks are priced today based on future expectations of a company’s stock value due to the growth of revenue, sales, and earnings. The stock market is pricing in decreasing company financial results in the near future.
- Traders have stop losses and trailing stops on their positions so when price drops these positions are sold creating more selling pressure and a downtrend that perpetuates itself.
- The closing of corporately owned retail stores, restaurants, and bars will cause publicly traded companies in the hospitality sector to miss earnings expectations in the next quarter.
- The reduced need of all the corporately owned hotels will force companies in the travel sector to miss earnings expectations in the next quarter.
- The reduced travel will push the airline industry to the brink of bankruptcy and will require a government bailout or some of them will go out of business. Crushing their stocks value.
- The crash in oil prices will drive down the profit margins of oil companies and cause them all to miss earnings expectations and put stress on their ability to make their debt payments on their bonds and pay dividends to stockholders.
- The closing of so many stores, restaurants, and hotels could lead to an approximately 20% unemployment rate in the U.S. from the hospitality and travel industry alone in the U.S.
- The closing of all the professional sports leagues will cause a tremendous amount of drop in economic activity.
- There are entire countries, counties, and cities under quarantine and limiting economic activity to essentials only crushing GDP and exploding unemployment which create bear markets.
- The CRB Commodity Index closed Tuesday at its lowest level since December 1972, down 72% from its 2008 high. Corporations that produce and sell commodities in most forms will see their profit margins crush and their stocks continue to decline.
- Selling escalates as mutual fund managers and hedge fund managers are forced to sell their positions for redemptions of their funds by investors.
- Equities as an asset class go into distribution as investors take risk off in a bear market for stocks.
