What Causes a Stock Market Crash?

What Causes a Stock Market Crash?

The Wall Street Crash of 1929 has been referred to as the Black Tuesday of the stock market. Thousands of investors rushed to discount brokerages and the markets, fearing the worst would happen. Prices plummeted throughout the day, leading to a complete stock market crash. Thousands more lost their jobs in the aftermath. Some people were so depressed that they turned to illegal alcoholic beverages or ran to speakeasies.

The crash was also the fault of many banks, including those that were backed by the Federal Reserve. Millions of dollars of loans were assumed by many of the banks, leaving them in debt. The sudden surges of deposits and withdrawals strained banks. Reserve requirements rose as deposits soared, while loan purchases fell. These counter-flow flows left many banks short of reserves. The ensuing panic caused the stock market to crash, and it was impossible to regain its former glory.

While a stock market crash is more severe than a stock market correction, it is still a good idea to follow the market’s trends. A stock market crash can cause a recession if the economy is not recovering from the previous period’s downturn. A recession is a drop in GDP over a two-year period, and investors should monitor their portfolios and their investments. This can be a huge mistake, and one that should be avoided at all costs.

What Causes a Stock Market Crash? When a country’s economy is in decline, the market becomes increasingly volatile and the prices of stocks and other securities plunge. Panic selling is another major factor in stock market crashes. Because stocks are based on expectations and perceptions, panic selling can cause prices to plummet to unsustainable levels. In the end, this type of selling is called capitulation. Eventually, the economy suffers and stocks fall.

Although a stock market crash can be short-lived, the impact is usually long-term. During the 1987 crash, the Dow lost 31% in one day. This happened on October 14, and trading was disrupted. The subsequent week, investors were spooked by talk of an impending recession. Ultimately, the crash lasted five years and caused the stock market to lose 18.1%. In some cases, the market may recover from a stock market crash in a few months or years.

Since the 1987 stock market crash, safeguards were put in place to prevent panicked investors from selling assets. These safeguards include circuit-breakers and coordinated trading halts. A decline of 7% or more in the S&P 500 Index, for example, would halt trading for a short period of time. A decline of 20% would cause the entire market to cease trading for the day. The United States economy began to feel the effects of a subprime mortgage crisis, which had a dramatic impact on the markets.

The 1929 stock market crash did not cause the Great Depression, but it did highlight underlying weaknesses in the nation’s economy and banking system. The crash marked the end of the era of American exceptionalism and the questioning of American values. The crash, while not the actual cause of the Depression, impacted more people than just investors. Nearly a third of the nation’s banks had invested in stocks, and many of them were forced to close due to dwindling cash reserves.