The situation of the international stock markets is more than dangerous for the interests of small and medium investors. Where the volatility and instability of financial markets is the greatest danger that can affect the valuation of securities that are listed on them. It cannot be forgotten that a fear that is gripping the different financial agents can be a very powerful signal about what may happen in the financial markets from now on. It is a risk that users have to assume before the fulfillment of this forecast for nothing positive.
A slowdown in the US economy is one of the factors that is alarming a large part of investors. In this sense, the US fund managers have carried out a cancellation of short positions to what may happen in the next few days, weeks or even months. This fact is affecting other financial assets, such as the decline in bond purchases. An indication about what can happen in the equity markets and that we will try to analyze in this article about one of the worst scenarios that can occur in the stock market: the stock market panic.
In this sense, the Federal Reserve Bank of Atlanta (United States) has been publishing in recent quarters a possible scenario in which interest rate cuts are forecast for the years 2020 and 2021. If these forecasts are met, it would not be surprising that the reaction of the stock markets is clearly downward. With the consequent depreciation in the securities listed on the equity markets. Not surprisingly, the performance of the S&P 500 has been very negative since the third quarter of last year. Despite developing important rebounds during this bearish process.
What if the stock market panic arrives?
In any case, the few important analytical changes from a technical point of view for an Ibex 35 that is still a moment of indefiniteness, although always within a deep downward trend with the formation of decreasing relative highs and lows. But it is no less true that some very important equity market analysts have been warning about the possibility that investors may experience a stock market panic at any time. In particular, derived from the problems that are having in the debt of some countries and states.
If this really happens, there will be no choice but to be very cautious to protect our investment portfolio. Not in vain, it is your money that is at stake in the end and therefore it is not advisable to leave everything in the hands of the improvisation as has happened to some small and medium investors when this process so little desired by them has developed. To remedy this serious problem we are going to provide you with some behavioral guidelines so that you know how to act with great diligence in these special situations,
Analyze investment terms
In the first place, it will be more than necessary for you to define which is the period of permanence to which your investments in the stock market are directed: short, medium or long. Because depending on this variable, you must use one or another strategy to defend your interests as an investor. Because if the taking of positions had been carried out for a short time, the best strategy you can use in a scenario of stock market panic is to undo positions as soon as you can because you can lose much more money than you have achieved up to that time.
It is always better to lose 10% than 50% on the stock valuation. This is a lesson to learn from past episodes of big downturns in equities. Especially if your intention was directed to the shorter deadlines to make your personal or family assets profitable. In no case should you worry about making such a radical decision since you should not ask yourself what you have lost, but on the contrary you must analyze what you can lose from this moment. Of course, in a situation of stock market panic it is much and more than you imagine at first.
More stable investors
Another very different thing refers to the actions of investors who are more stable in their positions in equities. That is, they do not want speculative operations for a few days or weeks, but their objectives are set from the medium and long term. In this case, your strategy will vary substantially based on this important factor. Because this fact can go unnoticed, hoping that as the years go by the share price recovers. Because there is a saying among investors with more experience in the financial markets that says that "in the long-term stock market always wins." This is not always true, but it is met with some regularity.
On the other hand, what can undoubtedly represent a stock market crash is a real opportunity to generate very profitable business. You cannot forget that at the end of the day you can buy very cheap stocks, with a very competitive market price as a consequence of this very special and at the same time radical trend. With discounts that can be formalized with 50% or even more with respect to the prices prior to the stock market panic scenario. Where they will have a much higher revaluation potential than before the crisis. This is well known by the strong hands of the market and therefore they know how to take advantage of it very effectively.
With a series of warnings
In any case, prevention is the best weapon available to small and medium investors to deal with this situation. Case always the stock market panic comes suddenly and does not allow you to react with certain efficiency. However, there are some signs that may indicate that this exceptional movement in the stock markets is near. As for example, a very abrupt change in trend and that it is accompanied by a large volume of recruitment. It can be a more or less reliable clue about what can happen in the next few months.
Another indication to detect this situation in the financial markets is the one derived from the existence of some financial bubble. In this sense, it is enough to remember what happened to technology companies in the 90s. Or in the same brick bubble that was one of the most relevant trigger for the appearance of the economic crisis in 2007 and 2008 with the consequences that everyone knows at the moment. Beyond other technical considerations and maybe even from the fundamental perspective.
What are the most sensitive values?
Another question that should be asked in a possible scenario of stock market panic is to detect the most vulnerable stocks to suffer large falls. Well, in these cases there are no exceptions and they all plummet over a fairly long period of time. However, there are some listed companies that perform worse than others in these stock-market depreciation processes. As for example the cyclical sectors, financial, technological and in general that are linked to the growth of the international economy. They are, of course, the most exposed to the effects of the so-called stock market panic.
On the other hand, there are other sectors and that although they are receptive to the depreciation of their value on the stock market, they do so with less intensity than those. These are the so-called defensive securities and in some cases act as a refuge from the capital stock in the financial markets. It is the specific case of electric companies and in some cases those related to food. It does not mean that your actions will appreciate in this scenario, but of course that they will do better than the rest.
Stay in liquidity
The only way to get out of this process unscathed is to be completely liquid. It is very complex to carry it out, but before the first disturbing movements can formalize this unique investment strategy. Namely, undo positions in the equity markets to keep them in the banking products of a lifetime (time deposits, national promissory notes or high-income accounts). On the other hand, it will serve to return to the financial markets when this process has finished, but with the great advantage that the shares of the listed companies can be bought at a much more competitive price than before.
Finally, it should be remembered that bags do not go down or rise forever, as you will know from your own experience. And after a period of stock market panic comes their recovery, even with a great intensity in the rises. Therefore, you have to be prepared for this great moment and the best way to do it is to be in liquidity and save the savings in your checking account. At least you will sleep much better in the face of what may happen to you for many and many months, which is, after all, what it is all about.