Over the past few months, the stock markets have been rising and falling at unprecedented rates – making investing daunting for everyone, even the pros. The benchmark S&P 500 alone experienced a 34% dip thanks to the COVID-19 in Q1 alone. 2020 has seen several record-breaking highs and lows in stock prices since that led to an all-time high in August. Why the sudden surge?
Read on for the 5 key factors having the biggest impact on the market and causing the volatility we have been seeing in recent weeks.
1. Global Economy is still Recovering from Covid-19
It’s no secret that the tech sector has been leading the recent market surge. Why? Thanks to the outbreak of COVID-19, millions have been left unemployed as department stores and restaurants started closing their doors. These closures created a void in the market, forcing investors to begin looking for new opportunities. Enter tech companies and innovators who have helped launch the world decades into the future by providing alternative ways to safely perform everyday tasks like shopping for groceries or even buying a car – all online.
As traditional retailers continue to struggle to return to the norm, new market participants that have focused on tech will continue to pave the way for volatility in many well-known tech stocks such as Apple (AAPL), Microsoft (MSFT), and Tesla (TSLA).
2. Government Stimulus Monies
The various stimulus packages, both personal and for businesses, that have been put together across the globe has helped buoy and elevate the sudden fall in consumer spending as well as offset the rapid job loss. Many fund managers see these stimulus packages as boosts to the economies that allow certain industries to profit.
The travel industry is a great example, as many investors fled many major airline carriers, only to discover they would be bailed out by stimulus monies to help keep them up in the air.
3. Fear of Uncertainty
This is a two-part issue. The first part is fear from COVID-19, originally due to the potential impact the outbreak would have on the market as investors quickly rushed to exit. Still scared, many investors have failed to re-enter the market as the economy has started to recover.
By April, many countries began to ease up on quarantine restrictions, thus driving some fund managers to jump back into the market. As things continued to improve, struggling retail investors eager to recoup their loss of income, became more involved in the market. Thus, causing more volatility by increasing trading volume as markets started hitting fresh highs.
4. Over-Excitement of the Highs
All the excitement of the market’s recovery has led many retail investors to continue to invest despite the multitude of overvalued companies. Hype in the Tech industry has led to an unprecedented, yet unsustainable run-up based on current earnings being released. The final week in August alone saw the markets started sowing seeds of doubt thanks to this over-excitement about corporate actions such as TSLA’s stock split. Many fund managers often have similar strategies and a research team to help guide their investments.
Now, those fund managers are taking gains due to their foresight to sell while retail investors are left holding stocks they purchased at over-inflated prices as the market crashed.
5. A Surge in Amateur Investors
Once COVID-19 hit, trading platforms like Robinhood and M1 Finance free commissioned trades and fractional investing attracting desperate, inexperienced investors eager to supplement their income after being laid off due to the quarantine or hoping to strike it rich in the market gold rush.
This made trading unpredictable by creating record highs and lows in stock prices at a near-unpredictable rate.
Summary
The final quarter of this year is expected to be the most volatile due to the upcoming US election along with low Treasury yields and the potential second round of stimulus checks to its citizens. How do you prepare for that? Experts agree that a diversified portfolio spread across a variety of assets is always going to be the best protection against a volatile market.
Fund managers aren’t planning their profits next week or even next month but are instead looking to the future by aiming to profit from long-term investments instead of next month’s lucky pick.