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Why The March 2020 Stock Market Crash Is Different From 2008?

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The velocity of the stock market crash across the globe in the first two weeks has taken investors by surprise. Many analysts are drawing comparison of the March 2020 coronavirus led crash as similar to the 2008 sub prime mortgage crisis led crash across the globe.

 

The US Dow Jones has fallen more than 20 per cent from peak levels, which means its technically in bear territory. On the other hand, the Indian Sensex is now down 21 per cent from peak levels, ensuring that it is also in bear territory. We have had two of the biggest crashes in the history of the Indian stock markets, now in the month of March.

It's different this time...

This time the crash is different and plagued by uncertainty. Let's explain. In 2008, when Lehman Brothers went bust, you at least had an understanding of the likely collateral damage. In this case, it's impossible as nobody knows how far the infections would spread.

German Chancellor Angela Merkel has warned that up to 70 per cent of the country's population - some 58 million people - could contract the coronavirus.

 
Why The March 2020 Stock Market Crash Is Different From 2008?

Mrs Merkel made the stark prediction at a news conference on Wednesday alongside Health Minister Jens Spahn. You see, if that kind of folks are infected, where is the question of travel, trade and business as usual. It's going to lead to a sharp economic downturn the world over, which in turn would lead to an earnings downgrade. So, markets are really justified in reacting the way they did.

A large European country like Italy has been completely locked out for the last few days. Imagine, an entire country coming to a standstill. So, this time the situation is really different in a sense that it is uncertain and no amount of stimulus and quantitative easing would work. These initiatives had worked well in restoring the health of the global economy following the Lehman Brothers crisis.

The only way the global economy would be back on track is when when the infections will start abating. But, then you are not sure, whether they will get worse, before they get better.

In the present case, it has impacted several continent and is a question of life and death. In the case of the Lehman Brothers crisis, it was largely restricted to the US, though the collateral damage was felt elsewhere. But, in this case it is clearly so widely spread across contents and countries. It's the uncertainty that has stunned markets around the globe and at the moment there is no drug that has been developed.

GoodReturns.in

Read more about: stock market
Story first published: Thursday, March 12, 2020, 13:37 [IST]
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