A stock market crash refers to a sudden drop in stock prices, typically by double-digits. This is triggered by investors closing their positions en mass as fast as possible out of fear of loss. This selling activity is what causes the prices to fall. But in seeing this, other investors start to panic, amplifying the downward momentum of the market.
Stock market crashes are started by a wide variety of factors. Let’s take a look at some of the causes throughout the last century. And whether another is on the horizon, in my opinion.
A history of stock market crashes
One of the earliest crashes in the 20th century was in 1907. The New York Stock Exchange fell by around 50% from its peak of the previous year. A retraction of market liquidity by some New York banks and a loss of confidence among depositors were among the causes of the crash.Â
In the bear market of 1929, the Dow Jones Industrial Average (DJIA) fell nearly 13%. This was a completely different situation where investors had been loading up on debt to buy stocks. But when the agricultural sector led to slowing economic growth, this house of cards came crashing down.
During the 1987 Black Monday, the DJIA fell 22.6%, while the S&P 500 fell by 20.4%. While the cause of this stock market crash is not exactly clear. It seems a build-up of negative news and fears of a market slowdown led to a sudden sell-off of stocks throughout the markets.
There is no denying that a financial crisis is bad news for investors. And the more recent stock market crashes in 2008 and 2020 serve as reminders of that. Â
Is a stock market crash coming?
Most of the major stock market crashes occurred in October. This has led many investors to be fearful as to whether a stock market crash is coming. Will this October see another market crash?Â
The recent volatility in the markets is undoubtedly unpleasant. But despite the recent downward pressure, all the major indices are still up significantly since the start of 2021. The Dow Jones is up over 13%, S&P 500 16%, NASDAQ 13%, and FTSE 100 is up over 9%.Â
Having said that, there is a valid reason to be concerned. The supply chain disruptions caused by the pandemic seem to be triggering price inflation worldwide. Meanwhile, unemployment levels continue to remain high. And when you combine increased inflation with reduced consumer spending, a recession often follows.
Why I feel Optimistic about the market.
Amid the fear, I still feel optimistic about the stock market for a few reasons. Firstly, the pandemic seems to be slowly ending now that vaccine rollouts worldwide are making solid progress. This has enabled industries to reopen and begin catching up on product demand, re-introducing jobs in the process.
But even if the worst were to happen, as a long-term investor, I’m not too concerned. While unpleasant to watch, these events create some of the best times to buy shares at a discount. So, I’ll be keeping my eyes open for any buying opportunities for my portfolio.
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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.
