2020 market crash, why more retail investors than Wall Street made money?

market crash

How deep is the fall this time?

The U.S. stock market crashed in 2020, although many Wall Street or investment experts usually educate everyone to take advantage of the stock market crash or a sharp pullback. During the 33-day crash from February 19 to March 23, the three major U.S. stock indexes representing the U.S. stock market fell from the highest point in history as follows:

  • Dow Jones Index -38.40% (Figure 1)
  • S&P 500 Index-35.41%
  • Nasdaq Index-32.59%

Figure 1: The Dow Jones Index fell 38.40% during the U.S. stock market crash in 2020 (Source Wiki)

The S&P 500 Index fell the deepest to 35.41%, which was far lower than the 57% of the global financial crisis in 2008 and 49% of the dot-com bubble in 2000. But this time the U.S. stock market crash in 2020, including Warren Buffett and other sophisticated investment veterans, Wall Street masters, and even hedge funds almost all confessed to themselves that they did not find any advantage from this crash. Why?

The reasons I think

  • The entire period of the U.S. stock market crash in 2020 was only 33 days, the shortest U.S. stock market crash in history, which caught everyone by surprise. Based on their past investment career experience, the investment veterans have no use this time; because the U.S. stock market crash generally lasts in years (see Figure 2 below).

Figure 2: The duration of the U.S. stock market bear market from 1956 to 2008 (Source: Bloomberg et al., as shown in the figure)

  • The U.S. Federal Reserve announced the implementation of the first unlimited quantitative easing in history, printing money madly, and hot money flowing everywhere; these funds mainly flow to the stock market, which boosted market confidence in the short term and quickly pushed up the market.
  • Many companies, especially technology stocks, streaming media, e-commerce, electronic payments, large food and supermarket retailers, remote work, home or lockdown concept stocks, have performed much more than expected, even before the COVID-19 pandemic. There is no full-scale economic recession (although there are still many industries falling into recession) that inevitably accompany previous crashes, so the stock prices of these companies have been pushed up. The market value of these major stocks originally accounted for a large proportion, which pushed up the market and prevented the market from continuing to fall.
market crash
Credit: Viktor Hanacek

No certain rule in stock market

According to the statistics of Goldman Sachs (ticker: GS), the return on investment of ordinary retail investors during this period was 61%, while that of Wall Street experts was only 45%. Instead, they are new investment novices, or retail investors, but many people have made money during the 2020 U.S. stock market crash. This incident once again proved that no one can predict the direction of the stock market, and it is impossible for stock market investment to have a fixed formula that can be applied.

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