Understanding the Stock Market Crash of 2020

A crash is caused when frightened sellers in a market sell their stock at a rapid pace. The reasons for a crash can include an unexpected global event, a crisis or a catastrophe that triggers panic. In 2020, the global pandemic caused by Covid-19 was the main trigger for the stock market crash of 2020, which has gone into the history books as one of the worst financial crises in the history of time.

What Constitues a Crash?

A stock market crash happens when there is a severe drop in market indexes in a short period of time. If the market index drops by 10% or more from its 52-week high in a few days to a few months, then it is called a correction. However, if it falls by 20% or more in a day or a few days, then it is a crash. The three main market indexes to watch are the Dow Jones Industrial Average (DJIA), the S&P 500 and NASDAQ.

What Happened During the Crash of 2020?

In February 2020, the market index hit an all-time high. A sudden crash began on 20th of February, and by the 9th of March, 2020, the S&P 500 closed at 2,746.56 points, having dropped by 225.81 points that day. It was a Black Monday for traders around the globe. On the 12th of March, 2020, the S&P 500 dropped by another 260.74 points to close at 2,480.64. The worst crash by far was the crash of the 16th  of March 2020, which was aptly named Black Thursday. On this day, S&P 500 dropped by 260.74 points (a whopping 9.51% drop) to close at 2,480.64. The stock market crash of 2020 launched the bear market ending the 11-year bull market that started in March 2009.

What Caused the Crash of 2020?

There are three explanations for the crash of 2020:

  1. The coronavirus pandemic – The emergence and subsequent spread of the highly infectious novel coronavirus (Covid-19) was one of the leading causes of panic. After all, the world had not experienced such a phenomenon since the Spanish flu of 1918. This unique phenomenon triggered the rapid and intense decline in the market indices. The market crash of 2020 is therefore also dubbed the Coronavirus crash.
  2. The extended bull market – Whenever the price of stocks increases for a very long time, the prices eventually become unsustainable. It is normal for bull markets to have corrections, and in 2020, the bull market that had held up since March 2009 finally collapsed.
  3. The Russia and Saudi Arabia oil price war – When the coronavirus pandemic of 2020 started affecting people around the world, more and more professionals started working from home, resulting in a stark decrease commuters. This led to a reduction in the price of oil as demand had fallen, aggravating the crisis even further.

Effects of Market Crashes

There are several consequences of market crashes:

  1. A market crash can lead to a bear market.
  2. A bear market or a stock market crash can also contribute to a recession, as was seen in the Great Depression and the Great Recession of 2008.

Right now, the UK is in a recession for the first time in 11 years. A lot of people have already lost their jobs, and many businesses are struggling to navigate the current financial waters. The effects of the novel coronavirus that was the main cause of the 2020 market crash are far from over, and some of the worst effects of the recession, such as rising unemployment rates, are among our country’s main challenges for 2021.