The stock market is one of the key sectors that economists analyze to predict the performance of the economy. After the coronavirus hit the global economy, the trend in the stock market has not been stable. There has been a significant drop in the prices of stock. However, at some weeks some little gains favored day traders such as David Portnoy. Most investors such as Warren Buffett are not 100% sure of the course the stock market may take. Just a few weeks ago, Warren Buffett sold his airline stocks due to the uncertainty of a potential second wave of the coronavirus. The stock market rally has petered out in the past few weeks showing an opposed forward movement.
The Wall Street Crash Of 1929
This year is similar to the 1929 Great Crash. It was the time the American stock market experienced a great blow. It began in September and ended in October when prices of a share on the NYSE fell. The crash indicated the start of the Great Depression.
The 2008 Zimbabwean Hyperinflation Collapse
In June 2008, the year of worst inflation, the yearly rate of the growth of prices was over 10 million percent. This lead to the rejection of the currency. November was when the inflation was at its peak with a rate of over 75000000000% every month. Due to this, a dollar was equal to Z$2621984228. According to the quantity theory of money, inflation was related to the Reserve Bank of Zimbabwe’s decision to upsurge the level of the money supply through printing. In money and banking, an increase in money printing would result in an increase in money supply which in turn will increase the prices bringing about inflation.
Trend Of The Stock Market
The stocks have not yet shown some significant improvement so far. There are indications of a return sell-off. A selloff is a short period where people sell a lot of securities resulting in a price drop.
After the Fed turned on digital indications of 0% rate of interest, stocks seemed to converse the 1929 Great Crash. Alternatively, there was a counter-rally, happening simultaneously with the money supply, M2, increasing. After the rise, M2 settled and the rate of growth slowed down significantly. According to predictions, if M2 goes down further, the stock market may begin its downward movement.
Concept Of Money Supply
Some Central Banks such as Central Bank of Kenya distinguishes between 6 concepts of money based on their liquidity. M0 comprises currency held by the non-bank public, M1 involves demand deposits in commercial banks and M2 includes savings and time deposits held by banks. M3 comprises deposits held by NBFIs.
The Federal Reserve’s Move To Handle The Financial Crisis
It looks like the Federal Reserve may print some money to deal with the situation. However, questions have arisen concerning the limit of printing money and its effectiveness. Predictions show that the following market downtrend may injure the economy even further as there are already reports of bankruptcies.