Major Financial Crises Timeline And Why Investors Shouldn’t Care

Major Financial Crises

Looking back on some of the most significant market crashes of the last decade, it is difficult to imagine how the world ever recovered. As the COVID-19 calamity proves, they usually come unexpectedly and take the world by storm. But I don’t think you should be concerned about major financial crises in the future.

Major Financial Crises

Investors who succumb to their anxieties and fears make rash decisions, such as selling into falling market trends. The plan is to recoup their losses before things worsen. But those who pushed through these crises and did not surrender to their loss aversion instincts not only recovered their losses but thrived as well.

As we will see later, every market decline in history has managed to recover, stabilize, and then grow, usually for the long run.

According to this chart that shows the historical trends of the S&P 500 Index throughout U.S. history, the average duration of a bear market (in which the market experienced prolonged declines) is 1.4 years, when the typical bull market lasts 9.1 years (in which the market prospers). Similarly, the bear market decline is 41%, compared to a whopping 480% for the bull market.

For many investors, the decline of the assets would compel them to sell, believing that the longer they waited, the greater their losses would be. For the rest, and while it can be difficult, waiting for the upturn during a market decline can be beneficial. In other words, the risk is missing out on the 480 percent gain rather than the 41 percent decline.

Here is a rundown of major market crises in history and recoveries throughout history.

The Wall Street Financial Crisis of 1929

The world came to a halt on October 29th, 1929, when the stock prices on the New York Stock Exchange plummeted drastically. Not only did it signal the end of the Roaring Twenties, an era of economic growth and prosperity, but it also signaled the start of the Great Depression, possibly the worst economic downturn in the history of the world.

During the 1920s, the U.S. economy experienced rapid growth. However, by the end of the decade, the stock market had fallen. Production slowed, unemployment increased, and wages fell. Prices began to fall, and on October 29th, the Dow Jones Industrial Average, a U.S. stock market that tracks the performance of 30 companies, fell 12%. The decline accelerated and did not stop until 1932 when prices hit an all-time low.

The downturn had a significant impact on the global market, and the unemployment rate in the United States has risen to 25%. Those who still had jobs had their pay drastically reduced. No wonder it was called the Great Depression.

To save the day, governments had to step in. President Franklin D. Roosevelt, for example, launched his “New Deal,” which included several policies aimed at boosting the economy and creating jobs. The measures were successful in repairing the economy, and the Dow Jones Industrial Average recovered in 1954.

Black Monday of 1987

Monday, October 19th, 1987, is remembered as Black Monday, one of the most notorious days in financial history. Investors around the world watched as the Dow Jones Industrial Average fell nearly 22 percent in a single day.

After the introduction of computers and because deliberate decision-making was removed from the equation in automatic trading, buy and sell orders were generated automatically based on the price levels of benchmark indexes. Before the crisis, the models used tended to produce positive feedback, which meant that more buy orders were produced when prices rose and more sell orders when they began to fall.

Investors were also concerned by crises such as the conflict between Kuwait and Iran, which threatened to disrupt oil supplies. The media did not help matters either, as it only served to magnify the panic. Many other factors played a role leading to that fateful day, but most agree that mass panic caused the crash to worsen.

Black Monday occurred quickly but did not last long, and financial markets in the United States and Europe fully recovered with the assistance of central banks that cut interest rates. The market not only recovered, but it grew by 15% in the five years that followed.

The Dotcom Bubble of the Early 2000s

Before the bubble burst, the U.S. technology stock experienced a rapid rise in price as investments in Internet-based companies skyrocketed (mainly the ones ending with .com domains, hence the name “Dotcom Bubble”). The value of equity increased exponentially, with the Nasdaq index increasing by more than 500% between 1995 and 2000. That was due to investors believing that online businesses will be hugely profitable in the future. They abandoned a cautious approach for fear of missing out on the expanding use of the Internet and the possibilities associated with it. With venture capitalists pouring money into the sector, start-ups were racing to get big quickly to cash in on the trend. They spent a fortune on marketing to establish appealing brands.

Overconfidence, combined with the overvaluation of investments because of marketing, caused the bubble to burst in the spring of 2000. The Nasdaq, a stock exchange in the U.S. that lists technology companies, has dropped by more than 80% in October of that year.

However, the Dotcom Bubble Burst did not last, and the market recovered after some years. The bubble, however, did not last, and the market recovered after a few years. Amazon, eBay, and Priceline are just a few of the companies that survived and thrived after the bubble burst.

The Global Financial Crisis of 2007-2009

In 2008, a global financial crisis left the world trembling in its wake. The bubble began to show signs in the summer of 2007 after years of cheap credit and lax lending standards. When the bubble eventually burst, financial institutions were left with trillions of dollars in nearly worthless investments. And many American homeowners discovered that they owed more on their mortgages than their homes originally were worth.

The crash sent the world into a recession, famously called The Great Recession. It cost millions of people their jobs, savings, and homes.

However, recovery started in early 2009 with the infamous Wall Street bailout, which kept banks open and helped restart the economy. Additionally, governments had to intervene to try and curb the decline and stimulate the market to recuperate. And central banks imposed stringent regulations to prevent further excesses and reduced interest rates to encourage investment.

Lessons from Major Financial Crises and Why Investors Should Not Be Concerned

As we have seen, market crashes, no matter how long they last, are only temporary, and some of the biggest recoveries have occurred right after a sudden crash.

1. Stay Steadfast

When you create a long-term investment strategy based on clear objectives, you will have the confidence you need to stay the course when everyone else is panicking. Emotions would take over and guide decision-making in the absence of a solid strategy. Investors who persevered through financial crises prospered after the storm passed.

2. Seize the Opportunity

Crashing markets are unavoidable. There will be one every now and then. Savvy investors always seize the opportunity to buy stocks or funds at a lower cost, then sell for a large profit when the market recovers. Take advantage of the opportunity to buy when everyone else is selling.

3. Do Not Fall for The Herd Mentality

Financial crises are tiny blips in the performance of a well-built portfolio. Market crashes and their consequences are no longer felt in the long run. So you are better off tuning out the noises of the herd and the media and concentrating solely on your financial strategy.

Conclusion

We looked at the major financial crises and how the world recovered afterward in this article.

And, while we cannot predict the future, history has shown that markets always recover. Good investors maintain their cool in the face of adversity. Financial crises, for them, are opportunities to buy low and sell high later when the market recovers.

Some time ago, I wrote an article which explains when to sell stocks, so make sure you read it.

 

 


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