A stock market crash is caused by two things: a dramatic drop in stock prices and panic. Here’s how it works. Stocks are small shares of a company, and investors who buy them make a profit when the value of their stock goes up.
Full Answer
What is a stock market crash and how does it happen?
What Is a Stock Market Crash? A stock market crash is a sudden and significant drop in the value of stocks, which causes investors to sell their shares quickly. When the value of stocks goes down, so does their price—and the end result is that people could lose a lot of the money they invested.
Is the stock market going to crash in 2021?
All right, let’s just say it: Even though stocks took a tumble in July—for a day—that doesn’t mean that “the big one” is on the way. Let’s get one thing straight: No one can perfectly predict whether or not the stock market is going to crash during the rest of 2021.
Can we overcome the effects of a market crash?
When we look back, we’re reminded that, yes, a market crash is a very difficult thing to go through, but it’s something we can and will overcome. The Great Depression, 1929: Over the course of a few days, the DJIA dropped nearly 25%. 3 It took a little over a decade for the economy to get back to predepression levels.
Will a crypto crash hurt stocks in 2022?
What's more, a decent percentage of crypto investors are also putting some of their money to work in stocks. A crypto crash in 2022 would likely weigh on stocks dependent on the cryptocurrency ecosystem, as well as reduce investment capital for equities. Image source: Getty Images.
Exploding Household Debt
"Households are borrowing 90 cents for every incremental dollar they spend, up from 40 cents four years ago," Pomboy observed, with the upshot that rising borrowing costs will create a crisis for debt-burdened consumers.
Soaring Cost of Necessities
Pomboy noted that total savings rose from $440 billion to $1.4 trillion after the 2008 financial crisis, but now are back down to $400 billion. Much of that massive reduction of savings, she said, is the result of large increases in the cost of nondiscretionary items such as food, energy, health care and housing.
The Pension Crisis
"We are looking at a $4 trillion pension deficit across the public and private sectors in the U.S., after nine years of rampant asset inflation," Pomboy also observed. On a per capita basis, that's over $12,000 for every U.S. resident. "If the market corrects even 15%, and stays there, it will bore massive holes in pensions," she added.
Where to Invest
Pomboy's clients are institutional investors, such as mutual funds and hedge funds . When asked by Barron's about her own portfolio, she said: "I have gold and an embarrassing amount of cash. I was short the market and managed to capture some of the rout in the first week of February.
Ten Events That Could Trigger a Stock Market Crash in 2022
Update: Thanks to a kind reader, this article is now available in Swedish.
1. No more free money
The Biden administration has signaled its intention to stop printing as many stimulus trillions this year as they did last year. This is a good thing for the economy, but passive market extractors don’t like it one bit.
2. Snowpocalypse
All that is necessary to extinguish the human race is for winter to blow a little colder, a little longer.
3. Rising interest rates
The Feds are desperate to slow down this “transitory” inflation. (Don’t tell your Congressperson, but words actually have meanings. Transitory means brief, momentary, fleeting. If this yearlong inflation is just a passing cloud, then why are they so worked up about trying to fix it?)
4. COVID-22
Sometimes I forget that we’re still in the middle of a global pandemic and a quarter of the American population refuses to understand that vaccines aren’t the hill to die on.
5. Petty politicians
There’s obviously a huge amount of anti-vax hysteria on the far right, but there’s also an outrageous amount of hysteria on the far left as well.
8. Crypto
Bitcoin and his/her/brrr buddies are now a $3 trillion Ponzi scheme, and if something (or someone) spooks the markets bad enough, it could cause a sell-off that crashes the real market.
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 causes a stock market crash?
A stock market crash is caused by two things: a dramatic drop in stock prices and panic. Here’s how it works. Stocks are small shares of a company, and investors who buy them make a profit when the value of their stock goes up.
How to respond to a stock market crash?
Here are five ways you can respond to a stock market crash: 1. Refuse to panic. As we talked about before, panic can make the crash just as bad as the actual economic hurdles we’re facing. Don’t fall for it. Dealing with the unknown creates uncertainty, and uncertainty left unchecked can become fear.
What was the most rapid global crash in financial history?
The Coronavirus Crash: In March of 2020, the COVID-19 pandemic triggered the most rapid global crash in financial history. However, the stock market regained ground relatively quickly and the year closed with record highs in all major indexes. So, keep your head up.
What to do if the stock market crashes again in 2021?
What to Do During a Stock Market Crash. If the market crashes again in 2021, remind yourself that you lived through another crash just last year. Of course, a crash is scary. Yes, you’ll have to make some adjustments. But with the right plan to move forward, we can and will continue to make progress.
What is the principle of investing?
The most basic principle of investing is to buy low and sell high. When stock prices dip low in a crash, we want you to think of it as buying on sale! Don’t try to time the market. Focus on time in the market.
How to prepare for a market crash?
You need specific advice for your situation—your age, your funds, the types of retirement accounts you have, and which Baby Step you’re on. Ask your pro if you need to make any adjustments in response to the crash. Don’t be afraid to share what’s on your mind. If you’re married, make sure your spouse is on the call! Make a plan for how you’ll move forward together.
Is it hard to go through a market crash?
Throughout history, the market has gone through many extreme ups and downs. When we look back, we’re reminded that, yes, a market crash is a very difficult thing to go through, but it’s something we can and will overcome.
