Why Coronavirus is causing markets to collapse

As the COVID-19 pandemic sweeps the world, governments are being forced to offer enormous stimulus packages to try and bolster the economy. Australia has delivered $189 billion to keep the workforce afloat, the UK has unveiled $706 billion of fiscal measures, and the US has signed a $2 trillion stimulus package, which is the largest in modern American history.

But despite these unprecedented amounts being pumped in to the economy, the stock markets have still been in freefall. There’s been a global downturn of at least 25 per cent, and Australian Prime Minister Scott Morrison has likened the current economic crisis to the Great Depression.

But big stimulus packages don’t work in times like this, explains eToro’s Popular Investor Joe Milazzo. “Imagine a snowball rolling down a hill, picking up snow and growing along the way until it’s too big to stop. The only thing that will stop it is that it runs out of steam on flat ground, or something stops it dead in its tracks and it disintegrates,” he says. “This is the analogy for today’s bear market. This is no longer a virus pandemic, this is an economic recession. The government can’t stop this bear market – they can only minimise the impact on everyday people. It’s like installing a little jump in the path of the snowball. Sure, the snowball will hit the jump and get some air (the market will go up) but it’s going to come back down and continue going down the hill. Government intervention is essentially guiding the market to the bottom. It can’t stop it, only slow it down to reduce the impact.”

Investors are expecting more than just monetary policy to tackle the global pandemic. Even though the Reserve Bank of Australia has pulled some extraordinary measures, such as cutting the cash rate to a record low of 0.25 per cent, and setting up its first ever quantitative easing program in a bid to encourage lending and investment, it’s still not enough for some industries. “The market is in freefall, it can’t suddenly bounce back to normal,” says Milazzo. “Whole towns, countries even, have been locked down. Factories shut down. Employees fired and sent home because they simply couldn’t work. All public events cancelled.”

The tourism industry, including many airlines, is now teetering on collapse, meaning governments will have to decide whether to step in and help, or leave them to go under. If this happens, markets will fall again. The uncertainty of how long the pandemic will last is adding to the volatility of the market.

Here are some tips to help you weather the storm:

1. Think long term.

Investments are designed to be long-term, so if your investments are based on a solid plan, don’t sell anything you wouldn’t sell if there wasn’t a crash. It’s only worth cutting your losses if you’re invested in a company that is clearly not going to recover.

2. Consider your risk tolerance

Risk tolerance is about how much uncertainty you are willing to live with in order to achieve potential gains. Think about your investment goals, the timeframe you’re hoping to achieve these goals in, and the experience you have in reading the market. Times like this can make you re-evaluate how risk tolerant or averse you are. When the market recovers, you can re-think your portfolio and if it suits your risk profile.

3. Think carefully before investing

Although the market is low, don’t rush in to investing immediately. If you want to take advantage of low prices but don’t want to risk your security, consider dollar-cost averaging. This means investing a fixed-dollar amount in to an investment every month, no matter what is happening within the market. Investing like this can afford you some volatility protection, rather than investing one large sum at a time.

4. Trade with confidence

eToro is the world's leading social trading platform. Join millions who've already discovered smarter investing by automatically copying the leading traders in our community, or get copied yourself to earn a second income.