What are the factors you should keep in mind while investing?
Why do fundamentals/technicals play a crucial role in the stock market?
How can you predict market crashes?
Are these some of the questions hovering over your mind? If yes, then you are at the right place. You might get some of it answered here in this detailed article. Let’s start!
What is a stock market crash?
A stock market crash is a sudden, unpredictable and dramatic decline in stock prices across many segments/sub-segments of a stock market, which results in a significant market cap erosion of companies and wealth erosion for investors/traders. Crashes are often driven by panic as much as they are by underlying factors including economic, geo-political, social and more. The crash is a result of speculation and formation of economic bubbles. Stock market crash is a social phenomenon where external events influence crowd psychology and encourage stock market participants to participate aggressively to sell.
A stock market crash generally applies to significant double-digit percentage losses in a stock market index over a prolonged period (period of several days to weeks). Crashes are different from bear markets becasue of the intensity of panic selling and dramatic price declines.
Difference between Market Crash and Bear Market
Bear markets is a prolonged period of declining stock market prices that are measured in months or years. Crashes are often associated with bear markets, however, they do not necessarily go hand in hand. Black Monday (1987), for example, did not lead to a bear market. Likewise, the Japanese bear market of the 1990s occurred over several years without any notable crashes.
Crashes are generally unexpected. As Niall Ferguson stated, “Before the crash, our world seems almost stationary, deceptively so, balanced, at a set point. So that when the crash finally hits — as inevitably it will — everyone seems surprised. And our brains keep telling us it’s not time for a crash
Irrationally high stock prices and excessive unjustified economic optimism,
Market where price–earnings ratios or P/E ratios exceed long-term averages
Extensive use of margin debt and leverage by market participants.
Wars
Large-corporation scams/hacks,
Changes in federal laws and regulations, and
Natural disasters (Usually in economically productive areas which directly/indirectly affects stock market value of a wide range of stock market globally For e.g – Covid-19 Coronavirus)
What is a recession?
It is a significant decline in economic activity, which may last anywhere between a few months to few quarters. A recession or a downturn is seen when there’s a significant drop in the following economic indicators:
real gross domestic product,
income,
employment,
manufacturing, and
retail sales.
Did you know?
A recession is a decline in economic activity for a prolonged period of time ranging from a few months to few quarters.
The 2008 recession was the biggest United States economic downturn since the Great Depression and its effects were felt for many years.
What is the official definition of RECESSION?
In economics, a recession is a business cycle contraction because of general decline in economic activity. Recessions commonly occur when there is a widespread drop in consumer spending (It is an adverse demand shock). It is usually triggered by various events, such as a financial crisis, an adverse supply shock, an external trade shock or the bursting of an economic bubble. Different countries have different definitions for example – In the United States, it is “a significant decline in economic activity spread across the market and sectors, which lasts more than a few months, visible in real GDP, real income, employment rate, industrial production, and wholesale-retail sales”. In the United Kingdom, it is defined as a negative economic growth for two consecutive quarters.
Governments of major countries respond to recessions by taking expansionary macroeconomic policies, such as increasing money supply or increasing government spending and decreasing taxation.
The National Bureau of Economic Research (NBER) defines it as “a significant decline in economic activity which is spread across the economy, lasting more than a few months” The NBER is the private non-profit that announces when recessions start and stop. It is also the national source for measuring the stages of the business cycle. NBER is the official arbiter of economic expansions and contractions. Its board members often include thought leaders, including Nobel Prize winners. Over 1,400 economics and business professors do its research.
Textbook Definition of Recession (U.S)
It was first suggested by Julius Shiskin, then-Commissioner of the Bureau of Labor Statistics, in 1974. It is
