We are living in very uncertain times as the world deals with the Coronavirus pandemic. The stock market has been very volatile. It has been up. It has been down. One question I receive a lot is, “what should people do with their investments?” Those of you who watch my channel know, I do not give investment advice on this channel or predictions for stocks. So I cannot help you out there. But I do know a lot about accounting history, and so I want to talk in this video about how market crashes work. And hopefully you will be able to take this information and make your own investment decisions for what makes sense for your own situation. WATCH NOW!
VIDEO SUMMARY
Let us start by going through the timeline of where we are at today. Today is Sunday, April 5, 2020.
- Friday March 13, 2020. President Trump announces National Emergency over the Coronavirus. (The United States has been under restrictions for three weeks where people need to stay home and unessential businesses close down)
- Tuesday March 24, 2020. President Trump announces talks on $2T stimulus bill. Trump predicts restrictions would be lifted by Easter (April 12, 2020)
- Sunday March 29, 2020. President Trump extended restrictions through April 30, 2020.
To put these events in context, let us look at the current chart of the Dow Jones Industrial Average for the last month. We can see the major stock market drop when the President announced the national emergency. We also see the stock market rise when the president announces the $2T stimulus bill. You can also see the rise stop, when the President extends the restrictions. This is a chart from Yahoo Finance. Anyone can go online and find this data.
The question on everyone’s mind at this point is, “what happens next?” Will the stock market go up? Will it stay flat? Or will it go down?
It is important to realize how important next week is. We are three weeks into the National Emergency. Many hourly workers were sent home on week one, and have not been getting paid. This is a particularly bad problem for the United States, because almost half of Americans live paycheck to paycheck. (according to a study published on February 19, 2020 from First National Bank of Omaha) Many of these Americans with no savings, are the same hourly employees who were sent home without pay.
Let us look at a timeline of the last three weeks:
- Week 1: Hourly employees lose their jobs
- Week 2: Paychecks run out
- Week 3: Companies start realizing people are not paying their bills
- Week 4: Next week…
So next week is a very critical week to watch what happens to the stock market. Again, the question we are asking is whether the market will go up, stay flat, or go down.
To answer that question, it is helpful to look at history. If you go back through all the market crashes that have happened in the United States, there are three main things that always happen.
- The stock market crash is a front-page story in the New York Times
- A Fortune 500 company goes bankrupt
- Someone goes to jail
These three things have happened in every stock market crash. Let us go back and look at the Great Recession of 2008, because many of us have a pretty good memory of what happened. First, the stock market crash in 2008 was on the front-page of the New York Times. Second, Lehman Brothers went bankrupt, which started the stock market crash. Third, the largest ponzi scheme in history was uncovered, orchestrated by Bernie Madoff who went to jail. All three things happened during the market crash of 2008.
Let me explain why these three things are important. The news story in the New York Times is an indicator of the magnitude of the situation. For example, if the Dow drops by 1.5% in a day, everyone is going to be upset and frustrated, but it is not going to be on the front page of the New York Times. A front page article is a red flag for you to notice that something big is going on.
Now let us talk about why a Fortune 500 company has to go bankrupt. At any point in time in the US, there is at least one major company that is being very aggressive with their finances. Whenever there is a major drop in the stock market, that company is going to fall apart. And they should fall apart, because it is a company’s responsibility to be prepared for some level of uncertainty in the future. Now you might argue, “can’t we prevent everyone from going bankrupt?” Unfortunately that does not really work on a social level. To stabilize an economic downturn, the government is going to have to provide some level of bailout to large companies. From a social aspect, the public is not going to stand for that, unless some irresponsible company pays the price.
Let us go to the third item. Someone has to go to jail. At any point in time in the US, there is probably some white-collar crime going on. These crimes are always shell games involving moving money around, which works as long as the economy does well. If there is a sudden drop in the stock market, the crime is going to be exposed and someone big is going to go to jail.
Someone might argue with me that the coronavirus is nobody’s fault, so why would any company go bankrupt or anyone go to jail. But you have to remember, we have had a full decade of increases in the stock market. That is a long time for the market to climb. It is pretty likely that there are a few bad players in the market. One of the purposes of market crashes is to remove the bad players out of the system, so the market can regrow in a healthy way.
Let us look at the stock market movements during the crash in 2008-2009.
- Lehman Brothers filed for bankruptcy on Sept 15, 2008
- December 11, 2008. Bernie Madoff was arrested for his ponzi scheme.
At this point some people thought we might be heading for a rebound, but that is not what happened. There was a second drop.
- February 2009, the whole economy was on the brink of collapse. Bear Stearns was about to go bankrupt, as well as the insurance company AIG and the auto maker General Motors. And there was a government intervention which stabilized the market.
Now let us look at current events today:
| Description | 2008 | 2020 | |
| 1 | Front page of New York Times | X | X |
| 2 | Major company bankrupt | X | |
| 3 | Someone goes to jail | X |
So far we have not had any major company go bankrupt or anyone go to jail. As I said before, next week will be week 4 of the National Emergency, which will be a very important week for the United States. So it is up to you to decide if the current market crash of 2020 will follow the pattern of history, or rebound on it’s own in a brand new way. I am going to leave this up to you guys. Why don’t you leave your prediction in the comment section down below. Will the market go up? Stay flat? Or go down?
Leave a comment down below letting me know what you think!
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.