Crashes and corrections are the price of admission to take part in one of the world's greatest wealth creators
A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @AMCScam
Key Points
Everything from COVID-19 variants to politics and history are potential threats to the S&P 500's historic bounce from a bear market bottom.
2. Historically high inflation
Some level of inflation (i.e., the rising price of goods and services) is expected in a growing economy. However, the 6.2% increase in the Consumer Price Index for All Urban Consumers in October marked a 31-year high.
3. Energy price indigestion
Crude oil could also spell doom for Wall Street over the next three months.
4. Fed speak
The tone and actions of the Federal Reserve could also cause the stock market to crash over the next three months.
5. A debt ceiling impasse
Keeping politics out of your portfolio is generally a smart move. But every once in a while, politics can't be swept under the rug.
6. Margin debt
Generally speaking, margin debt -- the amount of money borrowed from a broker with interest to purchase or short-sell securities -- is bad news. Although margin can multiply an investors' gains, it can also quickly magnify losses.
Why do stocks crash?
Stock market crashes happen as a result of panic selling of stocks, which could be triggered by the changes in federal regulations, extreme overvaluation of stocks, overinflated economy, natural disasters, sociopolitical events like war or a terrorist attack, and extensive use of margin and leverage by market players.
How did the 1929 stock market crash affect the economy?
Several banks folded, and people lost their life savings. In fact, the 1929 stock market crash heralded the Great Depression — an economic slump that took the US over 12 years to recover.
What was the biggest stock market crash in 1987?
Dubbed the Black Monday, the 1987 stock market crash is the biggest single-day loss in the DJIA history, percentage-wise. The DJIA lost about 23% of its value on a single day — the 19 th of October, 1987. Following the crash in DJIA, other major stock markets around the world began to decline.
What was the most famous stock crash in the US?
The 1929 Stock Market Crash. Probably the most famous stock market crash in U.S. history, the 1929 stock market crash brought an end to the market boom of the 1920s. It started on the 24 th of October 1929 — a day, popularly known as the Black Thursday — and lasted till Tuesday, the 29 th of October, 1929 (the Black Tuesday).
How long did it take for the stock market to recover from the DJIA crash?
Following the crash in DJIA, other major stock markets around the world began to decline. Unlike the 1929 crash that took more than 12 years to recover, the 1987 crash started recovering the day after the Black Monday and topped the pre-crash high in less than two years.
What caused the Dot.com bust?
Also known as the Dot.com Bust, this market crash was caused by the proliferation of internet companies. In the 1990s, investors recognized the value of the internet and started acquiring the stocks of dot.com companies with reckless abandon.
What was the cause of the Great Recession?
financial sector. The collapse of big financial institutions, like Lehman Brothers, Bear Stearns, and Washington Mutual, was the hallmark of the Great Recession.
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 was the stock market crash of 1929?
The stock market crash of 1929 followed an epic period of economic growth during what's now known as the Roaring Twenties. The Dow Jones Industrial Average ( DJINDICES:^DJI) was at 63 points in August 1921 and increased six-fold over the next eight years, closing at a high of 381.17 points on Sept. 3, 1929. That September day marked the peak of the ...
What happened to the stock market in 1929?
When the stock market crashed in September 1929, all of the entwined investment trusts similarly collapsed. In the wake of the crash, the banks and other lenders that financed the stock-buying spree had little means to collect what they were owed. Their only collateral was stocks for which the amount of debt outstanding exceeded the stocks' worth.
What was the total non-corporate debt in 1929?
By September 1929, total noncorporate debt in the U.S. amounted to 40% of the nation's Gross Domestic Product (GDP). At the same time that readily available credit was fueling consumer spending, the buoyant stock market gave rise to many new brokerage houses and investment trusts, which enabled the average person to buy stocks.
What happened after 1929?
The bursting of the stock market's bubble unleashed a cascade of market forces that plagued the U.S. economy for years after 1929 . The economy likely could have recovered more quickly in those ensuing years had the combined effects of excessive borrowing, business closures, and mass layoffs not exacerbated and prolonged the crisis.
What percentage of all consumer purchases were made on installment plans in 1927?
By 1927, 15% of all major consumer purchases were being made on installment plans. People in the 1920s acquired six of every 10 automobiles and eight of every 10 radios on credit.
When did the Dow drop?
By mid-November 1929, the Dow had declined by almost half. It didn't reach its lowest point until midway through 1932, when it closed at 41.22 points -- 89% below its peak. The Dow didn't return to its September 1929 high until November 1954.
What happens when investment trusts are heavily leveraged?
Some investment trusts, themselves heavily leveraged, also invested in other similarly leveraged investment trusts , which, in turn, invested in other investment trusts employing the same strategy. As a result, each of these trusts became inordinately affected by the movements of others' stock holdings. When the stock market crashed in September ...
