6 Things That Could Cause a Stock Market Crash
- Speculation. Many market crashes can be blamed on rampant speculation. ...
- Excessive leverage. When things are going well, leverage (a.k.a. ...
- Interest rates and inflation. Generally speaking, rising interest rates are a negative catalyst for stocks and the economy in general.
- Political risks. ...
- Tax changes. ...
- Panic. ...
What's really causing the stock market to crash?
While the exact cause of each of these crashes can get a bit complicated, stock market crashes are generally caused by some combination of speculation, leverage, and several other key factors. Here's a rundown of six different stock market crash catalysts that could contribute to the next plunge in the market.
What are the factors affecting a stock market crash?
The effect of firm and stock characteristics on stock returns: Stock market crash analysis
- 1. Introduction. Stock market is important in an economy because of its role in facilitating between surplus fund unit (investors) and deficit fund unit (stock issuers) to trade.
- 3. Data and methodology
- 4. Results and analysis. ...
- 5. Conclusion and managerial implication. ...
- 6. Suggestion for further research. ...
What is keeping the stock market from crashing?
- Earnings and profit growth estimates are too high
- Stagflation is becoming more prevalent (weak economic growth and rising inflation)
- Inflation indexes are continuing to rise
- Economic data is surprising to the downside
- Supply chain issues are more persistent than originally believed.
- Inventory problems continue unabated
- Valuations are high by all measures
What actually constitutes a stock market "crash"?
United States
- If Threshold Level 1 (a 7% drop) is breached before 3:25pm, trading halts for a minimum of 15 minutes. ...
- If Threshold Level 2 (a 13% drop) is breached before 1 pm, the market closes for two hours. ...
- If Threshold Level 3 (a 20% drop) is breached, the market would close for the day, regardless of the time.
What causes the stock market to crash?
While the exact cause of each of these crashes can get a bit complicated, stock market crashes are generally caused by some combination of speculation, leverage, and several other key factors. Here's a rundown of six different stock market crash catalysts that could contribute to the next plunge in the market. Image source: Getty Images.
What was the biggest drop in the market during the 2008 financial crisis?
For example, the steepest market drop during the financial crisis occurred during September and October 2008. Yes, it was real estate speculation and excessive leverage that led to the trouble, but fears that the U.S. banking system could potentially collapse sent investors into a panic, which led to the actual crash.
Why do investors buy REITs?
Investors buy these stocks specifically for their dividend yields, and rising market interest rates put downward pressure on these stocks. As a simplified illustration, if a 10-year Treasury note yields 3% and a certain REIT yields 5%, it may seem worth the extra risk to income-seeking investors to choose the REIT.
What was the crash of 1929?
The Crash of 1929 was a speculative bubble in stocks in general. The crash in tech stocks in the early 2000s followed a period of irrational speculation in dot-com companies. And the crash of 2008 can be attributed to investor speculation in real estate (and banks enabling the practice).
What happens when you have too much leverage?
Excessive leverage can create a downward spiral in stocks when things turn sour. As prices drop, firms and investors with lots of leverage are forced to sell, which in turn drives prices down even further. The most notable occasion was the Crash of 1929, in which excessive purchasing of stocks on margin played a major role.
What was the most notable event in 1929?
The most notable occasion was the Crash of 1929, in which excessive purchasing of stocks on margin played a major role. 3. Interest rates and inflation. Generally speaking, rising interest rates are a negative catalyst for stocks and the economy in general.
Why do stocks dive?
From an economic standpoint, higher interest rates mean higher borrowing costs, which tends to slow down purchasing activity, which can in turn cause stocks to dive.
Key Points
Although the stock market is a money machine over the long run, crashes and corrections are a normal part of the investing cycle.
The S&P 500's historic bounce from the March 2020 bottom could come to an abrupt halt this year
Since the benchmark S&P 500 ( ^GSPC -1.84% ) bottomed out in March 2020, investors have been treated to historic gains. It took less than 17 months for the widely followed index to double from its closing low during the pandemic.
1. The spread of new COVID-19 variants
Arguably the most glaring concern for Wall Street continues to be the coronavirus and its numerous variants. The unpredictability of the spread and virulence of new COVID-19 strains means a return to normal is still potentially a ways off.
2. Historically high inflation
In a growing economy, moderate levels of inflation (say 2%) are perfectly normal. A growing business should have modest pricing power. However, the 6.8% increase in the Consumer Price Index for All Urban Consumers (CPI-U) in November represented a 39-year high in the United States.
3. A hawkish Fed
A third reason the stock market could crash in 2022 is the Fed turning hawkish.
4. Congressional stalemates
As a general rule, it's best to leave politics out of your portfolio. But every once in a while, what happens on Capitol Hill needs to be closely monitored.
5. Midterm elections
Once again, politics isn't usually something investors have to worry about. However, midterm elections are set to occur in November, and the current political breakdown in Congress could have tangible implications on businesses and the stock market moving forward.
What are some examples of stock market crashes?
Historical examples of stock market crashes include the 1929 stock market crash, 1987 October stock market crash, and the 2020 COVID-19 stock market crash.
What caused the 2007/08 stock market crash?
The 2007/08 stock market crash was triggered by the collapse of mortgage-backed securities in the housing sector. High frequency of speculative trading caused the securities rise and decline in value as housing prices receded. With most homeowners unable to meet their debt obligations, financial institutions slid into bankruptcy, causing the Great Recession.
Why do investors lose money in the stock market?
The most common ways investors are bound to lose their money in the event of a stock market collapse is when they sell shares following a sudden drop in market prices after having purchased many shares before a market crash. Consequently, a market crash causes stock market investors to incur significant losses in their portfolios.
What caused the market to collapse in March 2020?
The market collapse in March 2020 was caused by the government’s reaction to the Novel COVID-19 outbreak, a rapidly spreading coronavirus around the world. The pandemic impacted many sectors worldwide, including healthcare, natural gas, food, and software.
Why did the Dutch tulip market collapse?
They mortgaged their businesses and properties to trade in tulips. However, when prices peaked, and then quickly collapsed due to an outbreak of the bubonic plague , it caught speculators off guard, who initially assumed that the craze would last forever. The unexpected market collapse sent the whole Dutch economy into a depression.
What was the first major market crash?
The Great Depression Crash of October 1929. This was the first major U.S. market crash, where speculations caused share prices to skyrocket. There was a growing interest in commodities such as autos and homes. Unsophisticated investors flooded the market, driving up prices in a panic buying mode.
What caused the dot com market to collapse?
As with the Crash of October 1987, the 2000 dot-com market collapse was triggered by technology stocks. Investors’ interest in internet related companies increased to a frenzied level following massive growth and adoption of the internet. Many start-up companies were able to raise millions of dollars going public via IPO’s with only a business idea. Eventually, many of these companies burnt through all of their capital and stock prices of other technology companies collapsed.
What happened on Black Monday 1987?
Black Monday crash of 1987. On Monday, Oct. 19, 1987, the Dow Jones Industrial Average plunged by nearly 22%. Black Monday, as the day is now known, marks the biggest single-day decline in stock market history. The remainder of the month wasn't much better; by the start of November, 1987, most of the major stock market indexes had lost more ...
Why did the Dow drop in 1929?
The Dow didn't regain its pre-crash value until 1954. The primary cause of the 1929 stock market crash was excessive leverage. Many individual investors and investment trusts had begun buying stocks on margin, meaning that they paid only 10% of the value of a stock to acquire it under the terms of a margin loan.
Why did the stock market recover from Black Monday?
Because the Black Monday crash was caused primarily by programmatic trading rather than an economic problem, the stock market recovered relatively quickly. The Dow started rebounding in November, 1987, and recouped all its losses by September of 1989.
What is FNMA mortgage?
In 1999, the Federal National Mortgage Association (FNMA or Fannie Mae) wanted to make home loans more accessible to those with low credit ratings and less money to spend on down payments than lenders typically required . These subprime borrowers, as they were called, were offered mortgages with payment terms, such as high interest rates and variable payment schedules, that reflected their elevated risk profiles.
What was the worst stock market crash in history?
The worst stock market crash in history started in 1929 and was one of the catalysts of the Great Depression. The crash abruptly ended a period known as the Roaring Twenties, during which the economy expanded significantly and the stock market boomed.
What was the cause of the 1929 stock market crash?
The primary cause of the 1929 stock market crash was excessive leverage. Many individual investors and investment trusts had begun buying stocks on margin, meaning that they paid only 10% of the value of a stock to acquire it under the terms of a margin loan.
When did the Dow Jones Industrial Average rise?
The Dow Jones Industrial Average ( DJINDICES:^DJI) rose from 63 points in August, 1921, to 381 points by September of 1929 -- a six-fold increase. It started to descend from its peak on Sept. 3, before accelerating during a two-day crash on Monday, Oct. 28, and Tuesday, Oct. 29.
Speculation
Excessive Leverage
- When things are going well, leverage(a.k.a. "borrowed money") can seem like an excellent tool. For example, if I buy $5,000 worth of stock and it rises by 20%, I made $1,000. If I borrow an additional $5,000 and bought $10,000 worth of the same stock, I'd make $2,000, doubling my profits. On the other hand, when things move against you, leverage can be downright dangerous. Let's say that …
Interest Rates and Inflation
- Generally speaking, rising interest rates are a negative catalyst for stocks and the economy in general. This is especially true for income-focused stocks, such as real estate investment trusts(REITs). Investors buy these stocks specifically for their dividend yields, and rising market interest rates put downward pressure on these stocks. As a simplified illustration, if a 10-year Tr…
Political Risks
- While nobody has a crystal ball that can predict the future, it's a safe bet that the stock market wouldn't like it much if the U.S. went to war with, say, North Korea. Markets like stability, and wars and political risk represent the exact opposite. For instance, the Dow Jones Industrial Average dropped by more than 7% during the first trading session following the Sept. 11, 2001, terror atta…
Tax Changes
- The recent Tax Cuts and Jobs Actshould certainly have the effect of higher corporate earnings, and is likely to be a generally positive catalyst for the market. On the other hand, tax increasescan have the opposite effect. One potential way to fix the Social Security funding problem would be to raise payroll taxes on employees and employers. There are several ways this could happen, but t…
Panic
- It's important to point out that crashes aren't generally caused by one or more of these factors all by themselves. It's typically a combination of a negative catalyst and investor panic that causes a sharp dive in the stock market. For example, the steepest market drop during the financial crisis occurred during September and October 2008. Yes, it was real estate speculation and excessive …
Some Combination of These Factors
- To be clear, this isn't an exhaustive list of things that could potentially cause a stock market crash. And it's likely that more than one of these factors could combine to cause a crash. The 2008 crash, for one, was primarily caused by excessive speculation that caused a bubble in real estate prices, along with excessive leverage taken on by both consumers and financial institutions, as …