A global market crash can have devastating effects on investors, businesses and economies. Historians agree that market crashes often stem from speculative bubbles, excessive leverage and rapid shifts in investor sentiment.
For example, the 1929 crash was a result of excessive investment in stocks and a resulting rise in asset prices that outpaced their real value. When confidence waned and the bubble burst, stock markets dropped, wiping out millions of fortunes and igniting a decade-long economic slump.
The 2008 financial crisis stemmed from a global credit meltdown and a collapse in the US mortgage market. When this led to a global recession, governments responded by increasing spending, guaranteeing deposits and bank bonds and purchasing ownership stakes in banks and other financial firms. The policy response prevented a global depression, but it took years for many countries to recover.
Today, a market crash might be the result of a combination of factors such as increased trade tensions and tight credit conditions. Speculation and excessive leverage can also push asset prices well above their real value, creating a “bubble”.
When reality catches up–maybe through disappointing earnings, regulatory change or an external shock–the bubble bursts and prices plunge.
The risk of a crash can be mitigated by following a prudent trading strategy and keeping emotions in check. Reacting out of fear can lead to early exits and locked-in losses. A considered, rule-based approach that takes advantage of volatility, hedging and technical setups typically outperforms panic selling during most market downturns.
About the Author
