Covid and the Future of the Stock Market: Will Another Crash Occur?

The fear of another stock market crash due to the Covid strain is palpable, but can we truly predict such an event?

The Psychology Behind Market Crashes

Market crashes are emotional reactions to underlying weaknesses or events that highlight risks taken for profit. No amount of regulations or circuit breakers can prevent these emotional responses because human creativity is boundless, especially during times of panic. Just as prison guards fail during a riot despite all security measures, these safeguards fail when market confidence is shaken.

The Cynical View: Grim Signs on the Horizon

The GameStop and similar incidents show that the stock market is more a gambling den than an equity market, which undermines investor confidence. Additionally, the real estate market has become incredibly volatile, raising further concerns about market stability.

While the initial triggers for a crash are clear, it is not imminent. Recent trends, such as a significant market correction after a long period of stability, indicate that bulls may continue to drive the market.

The Optimistic Perspective: Market Trends and Investor Sentiment

Despite fears, the market is not likely to crash soon. The immediate catalysts for a crash, such as the impact of the recent Covid strain on global markets, are temporary. As long as the vaccines continue to be effective, the market dynamics will remain favorable.

However, the market is currently overbought and overheated. This overconfidence could lead to a correction or even a crash in the near future. Therefore, it's important to remain cautious and consider investing in lower-priced stocks that offer more margin for error.

Investment Advice for Beginners

Divest from high-valued stocks: As a newcomer, it's wise to stick to stocks priced around 40 or less. This strategy helps mitigate the risks associated with volatile markets. Monitor FII data: Foreign institutional investors (FIIs) are continuously pumping money into the market. A significant outflow can signal a correction, but continuous inflows suggest a robust market. Avoid panic during corrections: Market corrections are a natural part of the investment cycle. Learning to weather these corrections builds confidence and resilience.

Conclusion

While the possibility of another market crash is real, it's important to approach investment with a balanced and informed perspective. Keep track of market signals and trends to make smart, reasoned decisions.