Another Big Stock Market Crash Around The Corner?

There have been several significant market crashes in the last 100 years. We can all sense that something is coming soon. Two things are for sure. 1. It’s coming. 2. You can’t time it. Maybe learning about past crashes can help us prepare for the next one.

The biggest stock market crash in history

A stock market crash takes place when stocks drop by a substantial margin. When it comes to the stock market, panic selling is the key characteristic that occurs. Some of the markets’ biggest crashes have had long-lasting and profound effects. The market crashes usually happen without warning, often following a long bull market run in which stocks continue to rise.

A deeper definition

Stock market crashes are governed equally by crowd dynamics, as does the real economy. Crash signals a bursting of speculative bubbles or happens after catastrophic events. Economic recessions or even depression can be covered by major stock markets crash. Investors see the value of portfolios decline as asset prices slump while publicly traded companies see their stocks sink, making them more challenging to generate additional funds. After the crash, lawmakers were frequently forced to enact reforms to address the fundamental economic factors that led to the crash involving job shortages and low disposable income levels in society.

What happens when the stock market crashes?

When investors lose faith in publicly traded assets, they sell their holdings and flee to cash, triggering a stock market crash. The impact of crashes varies also. Some crashes lead to a quick recovery. However, in most cases, these effects are generally widespread and last longer. The most famous was the 1929 crash. Though not the only cause, this collapse was one of the contributing factors of the Great Depression lasting close to 10 years. This was America’s worst economic slump in its history. Let’s take a look at the following list of the most important market crashes.

1929 stock market crash

The worst stock market crash since 1929 was one of the catalysts for the 1929 Great Depression. The market crash abruptly ended what is known as the Roaring 20s period, during which the economy expanded considerably. The primary cause for the 1929 crash was excessive leverage. Many individual investors began purchasing stock on margin or only 1% of the value of the stock in exchange for margin financing. When the debt bubble burst, it triggered the worst stock market collapse in modern history. The Dow did not return to its prior crash level until 1954, while it reached its worst in 1932.

Black Monday crash of 1987 — October 19th

Black Monday is remembered as the worst day in stock market history. There were some worrying signs brewing as trading volume had been slowing as 1987 progressed. But these factors drove the sell-off: narrowing the U.S. trade deficit, computerized trading, and the Middle East tensions. The market grew relatively quickly and recovered all losses in September 1989 when the Dow began rebounding in November 1987. Programmatic trading occurred when the computer system made automated traders and was the major logical factor behind the crash.

Dot-com bubble of 1999–2000

During the late 1990s, the value of internet stock grew sharply. In 2000 the NASDAQ Composite Index dropped by 2,662 points to 2,470 points. The index plunged further by 66.71% before it touched the lows of 1,139.90 points in October 2002. This spectacular collapse was the result of a combination of factors, including changes in equity culture that encouraged an increase in speculation, overvalued stock prices that were supported by the belief that there was no risk, and misplaced investments into the internet companies that empty their venture capital coffers. Globally, around $5 trillion worth of market value vanished by 2001.

The financial crisis of 2008

In 1999 the Federal National Mortgage Association wanted to make homes available for the lowest credit rating with low monthly payments. Subprime borrowers were offered loans with payment terms that reflect their increased risk profiles. This increased available mortgage credit appealed to previously ineligible borrowers and investors and drove explosive growth in mortgage originations and home sales. In March 2007, the stock market began showing signs of collapse when investment bank Bear Stearns couldn’t fund its losses linked to subprime mortgages. The Dow did not meet its lowest point until March 6, 2009.

Coronavirus crash of 2020

Starting on February 20th, the Dow and S&P500s experienced a number of sharp daily drops. The crash was technically over by March 23rd. During this period, the market lost its value by 33%. The sustained recovery was driven by the Fed’s move to cut rates with a $1 trillion bailout fund, and Congress passed a $2.2 trillion U.S. federal aid package. Economists and analysts have not reached a consensus regarding the cause of this crash. Note that there were warning signs such as the inverted yield curve since mid-2019, and the majority of economists were predicting a recession.

What can we do now to protect our investment?

The traditional financial advice is diversification. Please make sure that your portfolio is not exposed to a single company or other entities or countries with high-risk factors because it will limit the damage if any one of them fails. Other financial advice is to stay as liquid as possible, to sell as early as you can. We hear more and more talks of some sort of market correction-related predictions from “experts”. Inflation is creeping up due to a sustained low-interest environment and consumers are ready to start spending their savings as we recover from the pandemic. Obviously, climate change will start making an impact on our economy and daily lives. There are so many of these warning signs that we have to consider but we have to remember that it’s certainly coming and we can’t time it. Be smart and risk-assess your assets based on your personal circumstances.

Hope you enjoyed the article.