What Can Stop People from Panic Selling?

The crash of 2020 is already taking its place among the worst market crashes in history and a global recession is irrepressible if the panic cannot be taken under control.

Photo by Chris Liverani on Unsplash

Now that S&P 500 and Dow Jones Industrial Average indexes are down from their all-time high almost by 35 percent, British Pound is back to the lowest levels since 1985 and all the markets are going down the hill globally, I think it’s quite fair to call this a major crash and a bear market, instead of a healthy correction. So far, $24 trillion is wiped out from the global stock markets(BusinessInsider, 2020). Despite all the efforts of FED and all other central banks printing an unlimited amount of money, cutting the interest rates almost to 0, and injecting all the cash into the markets, it just keeps crashing and doesn’t seem to be slowing down any time soon.

Knowing that in these kinds of times, people freak out quite easily and starts selling every single asset, they tend to move towards the safest assets possible. Tracing the money reveals which asset is seen as the safest in this crash. This time the obvious winner is the U.S. dollar. According to Bank of America, cash saw its fourth-biggest inflow over the week at $95.7 billion(BusinessInsider, 2020). Such a big volume of cash inflow brings a high level of volatility and more sell-off with the triggered panic.

Is the ultimate tool to stop the panic: Circuit Breaker useful this time?

Everybody is trying to stop people from panic selling before this crash drags us to a global recession. One of the tools that global stock markets are using to stop irrational sell-off decisions is called a circuit breaker. Investopedia defines this term as:

Regulatory measures to temporarily halt in trading on an exchange, which are in place to curb panic-selling.

Every market has different limits of circuit breaks and different halting periods in different cases but as the most common example, U.S markets stop trading when S&P 500 drops 7%, 13%, and 20% intraday.

  • When the drop is 7%, markets stop trading for 15 minutes,
  • Another 15 minutes break follows if the drop reaches to 13%,
  • And a whole day halting gets in place if the drop is as big as 20%.

Circuit breakers are not only triggered when there is a market drop but also when the markets move up intraday in significant percentages. However, currently, a move up in high-percentages is so rare, some countries like Turkey have decided to deactivate the upper limit of the circuit breaker trigger and allow markets to keep the tendency to go up if they can (Borsa Istanbul, 2020).

The circuit breaker is useful when there is flash news hitting the market during the day for a moment and creates panic. Then people get 15 minutes or a full day to take a breath, decide if this news is temporary or if it has fundamental effects and reconsiders their strategy to follow a more rational approach when markets resume trading. However, this time the situation is a bit different. The panic is not temporary and people’s expectation is not to buy cheaper but to stay alive and save their money from losing all its value in a possible long-term bear market. Therefore, the sell-offs continue even after the halting period ends and markets restart trading.

If we look at the overview of the measures taken to stop the panic selling so far: Printing money has failed, cutting interest rates has failed, central banks buying bonds and all kinds of financial assets from the markets has failed, billions of dollars worth government aid packages have failed and circuit breakers have also failed. It’s now pretty clear that this panic sell cannot easily be stopped only by economical measures and people will only take a breath if a major breakthrough in the fight against the novel coronavirus, Covid-19, comes to the surface. This is a desire not only for the markets but also to regain the healthy and social life that we once had and have been taking for granted for so long.

Be safe out there!

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Disclaimer: This article is provided for informational or educational purposes only and is not any form of individualized advice. Use this information at your own risk.

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