To put it mildly, the stock market tanked this week. Despite the massive decline, the good news is that the stock market is still up since Donald Trump became president.
Here’s what you need to know.
Stock Market Performance
The Dow Jones Industrial Average closed at 25,409.36 on Friday, following a nearly 3,000 point drop this week. The Dow is now about 15% lower than its all time high. The main culprit: a global concern about the spread of COVID-19, also known as coronavirus.
Here’s the good news. Despite the market decline, the Dow is still up – as of Friday’s close – 28% since President Trump was inaugurated on January 20, 2017.
How Bulls And Bears View The Market
The Bulls: For bulls, the pullback is an over-reaction on a singular macroeconomic event. Yes, the virus may have global implications that could hamper production, supply chains and growth for key economic sectors. However, they view the virus as an independent event that cannot hold the economy back for a prolonged period of time. Further, they believe the market will bounce back given the precipitous sell-off in such a short time frame.
The Bears: For bears, this market sell off is just getting started. To these investors, the fear of coronavirus is real and will have severe implications for the global economy. However, in their view, the market sell-off is more than this singular incident. The sell-off represents cracks in the underlying economy, which have been masked due to intervention from the Federal Reserve and central banks to prop up global markets.
So, who’s right?
It all depends on how much is already priced into the market – and whether you believe the market drop is driven primarily by this macroeconomic event that eventually will pass, or whether it’s a more ominous sign about the true state of the economy. There are countless possibilities of what comes next. Here are a few to consider:
1. The market bounces back in a sharp, V-shaped recovery
What it looks like: The market fell 3,000 points. The market bounces back 3,000 points quickly. This could conceivably happen with or without Fed intervention or another economic catalyst.
2. The market rebounds in a slower, U-shaped recovery.
What it looks like: The market fell 3,000 points. The market rebounds in a slower recovery, but rebounds at or above recent market highs.
3. The market pauses.
What it looks like: Following this week’s drop, the market trades within the current range of 25,000, plus or minus.
4. The market continues to sell-off
What it looks like: This week’s market declines may be just the beginning. While the Dow fell nearly 1,000 points on Friday before recovering to down 357, the market could drop another 10-15%.
5. The market sells off more aggressively
What it looks like: Bears such as Nouriel Roubini, also nicknamed Dr. Doom for his bearish outlook, predict global equities to sell-off 30-40%. If this scenario happened, things would need to get much worse before they get better.
Stay tuned – and hold on.
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