Fun Facts About Terrible Things: Stock Market Crashes!
Mar 06, 2018 Emily Lewis, Thinker, Drinker, and Finance Tinkerer
The ticker tape flashes across the bottom of the news as we pour coffee. Which unlucky schmuck of Wall Street had to ring the networks to cue up the crash templates?
Who decided the market crashed today?
Though we have survived 100% of stock market crashes in our lifetimes, news coverage and people who wear suits treat crashes as apocalyptic. One pictures Manhattan mobs, SWAT Teams in tactical gear (except with calculators) crashing through the windows of the NYSE screaming orders to enact Crash Protocol Three while terrified market analysts take cover.
Since that (probably) doesn’t happen, let’s go:
What happens when the stock market crashes?
Any handy graph on any screen will show you that The Dow dropped a significant amount in a short period. Stocks have plummeted!
What those graphs mean to say is that the dollar value of assets decreased over a giant chunk of the market.
Where did all the money go?
Nowhere! It was used to purchase things, so the cash is long gone, and all the goods are still there. A lot of money was sunk into that collection of material initially but, when all the factors got plugged into the equation for the day, the value came out much lower than desired. If this happens to a lot of the market quickly, you’ve got a crash.
How did the stock market crash in one day?
It’s like getting a cold. You feel yourself coming down with something, and soon it develops into a full sick day.
Similarly, the stock market never just free-falls out of the blue. Stock prices decrease a little based on shrinking economy, which worries investors, so investors pull out, which lowers the stock prices, and so on.
Who is fixing it?
Crashes are mostly math being heartless. The stock market makes its living (your returns) by calling the game in the fifth inning, and we feel the pain when it corrects for an overly optimistic prediction the strength of the bullpen. Changing the formulae to minimize the blow would be like giving new uniforms to a losing team mid-game so, unfortunately, not much is happening to alleviate a stock market crash per se.
Over time, reinforcements tagged in to mitigate the preludes to a stock market crash. The Federal Reserve was born in 1913 as a buffer for market forces and long-term interest rates. FINRA (or The Finance Industry Regulatory Authority for the verbose) regularly halts trading on different stocks for around an hour during the day to enforce cooling-off periods. A decline of particular magnitude in a market will trigger an automatic, finite shutdown of that market.
Why did the stock market crash?
In fact, the stock market didn’t crash. The Dow experienced its largest-ever single-day loss (1500 points), ending 1175 points down. This amounts to about 10% value loss for the market, which is a small(ish) correction. The market is precarious, but not crashing.
The cable-news version: “the housing bubble burst.” In better words, banks were giving out untenable home loans. Borrowers couldn’t keep up and declared bankruptcy. Many banks ended up on the ropes for those sums. As banks collapsed, stock values plummeted. Investors got anxious and sold their shares. The Government and IMF bailed out a few banks, but the damage was done.
Black Monday - October 1987
This crash literally swept the planet!
Unlike most crashes, the market fall started only five days before the October 19 crash. Investors lacked trust, and the process accelerated.
Why? Glad you asked! In 1945, a conference backed every US$35 with one ounce of gold.
Rebuilding countries kept their reserves in cash. In 1971, Nixon ‘fessed up to the United States’ insufficient gold to back everybody’s US notes.
Developing countries were also encouraged to take out loans. As time wore on, brutal payment plans sent nations into worse crises, and they were reasonably unhappy since their cash had been declared worthless.
Back to the stock market: Values fell a little; people panicked a lot. The disquiet boiled into a crash, with a bear market and everything. A few incidents, like a storm in London, caused global mayhem.
The market recovered in two years though, so that’s good. Plus, 1987 brought trading halts so that people couldn’t panic as hard, and analysts could take time to compute fair-value ranges for trading.
The Great Crash of 1929
The Roaring Twenties - new technologies woo investors, and they put a lot of money into them. Summer 1929- the prices of stocks quietly begin a decline, which sparks anxiety, leading investors to pull out, which causes further dips in stock prices.
It exploded on October 24-29, 1929. Sell orders flew into the NYSE from investors, wires jammed, the ticker tape (actual paper back then) blew up. The information vacuum created by mass panic subsequently caused even more panicky sell orders. (This is where we get the image of mobs storming Wall Street associated with crashes - people did this in 1929 because they needed information.)
In essence, 1929 crushed the market’s credit limit. Margin calls came into play. Investors had to pay the difference between the current stock price and its actual value or liquidate their shares. Guess which was the more frequent outcome?
The situation spiraled, and the market bottomed out in 1932 (thanks, Great Depression).
The 1907 Panic
This little case hides in the shadow of 1929, but the NYSE fell 50% between 1907-1908 because of egregious manipulation of copper stocks.
Trusts and banks lost everything, and JP Morgan saved everyone.
The Federal Reserve was formed in 1913 because JP Morgan didn’t want to save everyone again in the future.
So why does the stock market crash?
Crashes are variations on these themes:
- Speculative bubble bursts
- Lending with Godfather-like aggression
- Panic over market corrections
- Panic over the effects of investors panicking
When will stocks go back up?
Some savvy brokers, analysts, and businesspeople met to tackle this question, and they agreed: your stocks will go up! The declaration probably came from heated debates where they knocked over their easels while passionately pointing out things on graphs.
As our time travel shows, it could be two years or twenty-five before the market recovers fully from a bona fide crash (though stocks have not crashed just now).
Listen for buzzwords in the news to track history repeating itself: speculation, bubbles, Bear Market, corrections, Dow percentages…
Should I be investing?
Investment is never guaranteed, but here are a few rules of thumb (I’ll make you a diagram one day):
- Is it October? Then no. Just wait.
- Have there been any banking scandals lately? If so, it’s a no.
- Is it a Bear Market (“where stocks are selling for way less than they’re worth in massive quantities,” she whispered on the off-chance that somebody didn’t know what that meant)? Go for it! But not too hard, and don’t plan on anything happening in the short term.
It is all risky business, and of course, we tend to focus on investment at its scariest. Luckily, you can use technology to help you learn the ropes without risking money. These are crucially fascinating times, and you should check them out.
Now that you know fun facts about terrible things - stock market crashes, start exploring for yourself. Happy financing!