Significant downward movement in the US Stock Market: Causes, countermeasures, and investor choices

In the global financial market, the US Stock Market has always played a leader role. It reflects not only the trends of the US economy but also those of the global economy, significantly influencing international financial sentiment. However, market fluctuations are inevitable, and at times, significant downward movements occur. For investors, how should they make judgments and respond in such situations? This article will explain the following points:

1. Factors causing a significant downward movement in the US Stock Market
2. Learn from past cases: The background of historical downward movements
3. How to Identify Signs of a Sudden Drop in Stock Prices
4. Determining whether to sell or buy during a downward movement
5. How to Utilize Hedge Strategies

Factors Causing Significant Downward Movement in the US Stock Market

The sharp decline in stock prices is not incidental. Understanding the factors that influence stock price fluctuations is crucial for predicting market changes. When checking daily news and economic indicators, pay particular attention to the following points:

(1) Economic indicators: Important indicators for investors to assess the economic situation. Strong numbers lead to an increase in stock prices, while deterioration can be a factor for downward movement. Key indicators to pay attention to include the following:

• Decline in GDP growth rate: Indicates a slowdown or contraction in economic growth, which may lead to a deterioration in corporate earnings.
• Rising unemployment rate: This indicates weakness in the labor market and may lead to a decrease in consumer spending.
• Sharp rise in Consumer Price Index (CPI): High inflation can lead to an increase in the cost of living, potentially suppressing consumption.
• The Manufacturing Purchasing Managers' Index (PMI) falls below 50: indicating a contraction in the manufacturing sector and potentially signaling an economic slowdown.

(2) Monetary Policy: The monetary policy of central banks also has a significant impact on the stock market. Interest rate hikes can increase borrowing costs and potentially suppress consumption and investment, while interest rate cuts can have the opposite effect. In September 2024, the Federal Reserve Board (FRB) announced a 50 basis point rate cut. This was positive news for the stock market. Investors also need to pay attention to the results of the FRB meeting in November.

(3) Geopolitical factors: International conflicts, political events, and trade policies also influence investor sentiment and market trends. Attention is also needed regarding the recent rise in geopolitical tensions.

(4) Market Sentiment: Investor confidence and fear also contribute to stock price Fluctuation. An increase in the VIX fear index suggests that investors' risk-averse stance is strengthening.

These factors can influence each other. For example, policy changes can affect economic indicators, which in turn can influence market sentiment and ultimately lead to stock price fluctuations. Therefore, it is important for investors to understand these factors comprehensively and make appropriate investment decisions.

Learning from Past Cases: The Background of Historical Downward Movements

Let's look back at the representative examples of downward movement in the US Stock Market, namely the financial crisis of 2008 and the crash due to the COVID-19 pandemic in 2020.

2008 Financial Crisis

In 2008, the collapse of the US subprime mortgage market dealt a significant blow to the global financial system. From the end of 2007 to the end of 2008, the Dow Jones Industrial Average fell by over 33%, and the Nasdaq Composite Index dropped by over 40%. Many banks and financial institutions faced the risk of default, leading to a global credit contraction.

2020 COVID-19 pandemic

At the beginning of 2020, the global outbreak of the novel coronavirus had a significant impact on the world economy, and the stock market also experienced considerable downward movement. From February 19 to March 23, the Dow Jones Industrial Average fell from 29,551 points to 18,591 points, recording a decline rate of 37%. The global lockdown led to a stagnation of production activities and a sharp decrease in consumer demand, which were the main factors.

These examples demonstrate that various factors, such as internal issues within the financial system and global health crises, can lead to a significant downward movement in the stock market.

How to Identify Signs of a Sudden Downward Movement in Stock Prices

To predict market fluctuations, it is important to bridge the information gap. It is essential to regularly check various information such as economic indicators, monetary policy, geopolitical factors, and market sentiment.

Particularly, it is necessary to pay attention to factors that may lead to a financial crisis, such as excessive leverage, asset bubbles, and credit risks. When the market is at a high level, it is also advisable to appropriately adjust investment ratios or consider purchasing risk hedging products such as bonds, gold, and hedge funds. Additionally, diversifying investments across asset classes, industries, and countries/regions can also be effective in mitigating risks.

Currently, many brokerage platforms provide the latest financial news in real-time. Among the major platforms, some organize news and investment data and categorize them for easy access.

This information is available on various trading platforms (Web Trader, macOS, Windows, iOS, Android), allowing you to access the latest information anytime and anywhere. You can minimize risks due to information gaps and quickly grasp market trends.

Furthermore, some platforms provide virtual funds for simulated trading for new registrants, allowing them to learn the rules before starting actual trading.

Investor Responses During Stock Price Downward Movement

1) Decision to sell or buy

During a downward movement in stock prices, investors are faced with the difficult decision of whether to sell to avoid further losses or to buy more in anticipation of a rebound.

First, predicting short-term market trends is very difficult, and investment decisions should be made based on long-term investment goals and risk tolerance. Some investors choose to sell during stock price downward movements, but this can lead to missing out on opportunities for market rebounds. Historically, the stock market tends to rebound after significant declines.

On the other hand, the downward movement of stock prices also presents a good opportunity for buying more. Stock prices reflect the market's expectations regarding the future earnings of companies, so a downward movement in stock prices may suggest that future earnings are being underestimated. However, this requires sufficient analytical ability.

Therefore, there is no uniform answer to the question of whether to “sell or buy more,” and it is necessary to make a judgment based on each investor's situation. If you have sufficient patience, confidence, and financial flexibility, a significant downward movement may present a good opportunity to buy more. Conversely, if you feel uneasy about the market outlook or cannot tolerate further losses, you should consider selling part of your holdings or waiting and observing.

When the market outlook is uncertain, using hedging tools can also be effective. Options, futures, and contracts for difference (CFD) are available, but for new investors, CFDs can be considered a relatively approachable hedging method.

2) Hedging Strategy Using CFDs

Long-term investors may choose to increase their investments after a significant downward movement in the market. In particular, they focus on fundamentally sound blue-chip stocks that have been oversold in the market. This requires unique analytical skills, and it is important to remain unaffected by market sentiment. On the other hand, short-term investors and traders may react more sensitively to short-term fluctuations in the market and may need to adjust their investment strategies accordingly.

When the US Stock Market is in a downward movement, it is possible to hedge by shorting stock index CFDs such as the S&P 500 index, Nasdaq 100 index, and Dow Jones Industrial Average. CFDs offer leverage of up to 200 times, so if the index declines, it may sufficiently cover the losses of individual stocks. Compared to options and futures, CFDs have higher leverage and a lower trading threshold, making them suitable for small investors' risk hedging. However, caution is required when using leverage.

The specific steps for short trading using CFDs are as follows:

1. Open a trading account, deposit funds, then search for the index you want to short on the trading screen and click “Sell”.

2. Enter the order details and click the “Sell” button to initiate a short position on the stock index.

Summary

For investors, the most important thing is to maintain long-term investment goals and plans without being swayed by short-term market fluctuations. The upward and downward movements of the market are a normal part of market mechanisms, and it is essential to view investments from a long-term perspective rather than being influenced by short-term fluctuations.

When faced with a significant downward movement in the US Stock Market, investors need clear investment goals, a rational investment mindset, and a flexible investment strategy. Through continuous learning and practice, they will be able to respond more effectively to market fluctuations and achieve long-term investment value.