Sent: 04-08-2009 11:26:01
In this issue:
Return to full article list
HomeFree weekly newsletterSelf Managed Super Fund ArticlesContact usLogin
Now That Was a Crash
Investors would be justified in thinking that the performance of the stock market over the last 12 -- 18 months is unique. Many no doubt believe they are living through the biggest such event in history. They would be wrong and should be disabused of that notion.
As I have pointed out many times in the past, stock markets are dynamic, they sometimes (usually) move up but they can also move downwards, and sometimes with a vengeance. This is not the first time that markets have reacted in this manner and it will most certainly not be the last. I recently encountered the list below that illustrates 10 major downturns on global markets:
10) Wall Street 1901-03: -46%
The market was spooked by the assassination of President McKinley in 1901, coupled with a severe drought later the same year.
9) Wall Street 1919-21: -46%
There were fears that the new automobile sector was becoming overheated and that car ownership had reached saturation point.
8) Wall Street 1906-07: -48%
Markets took fright after President Theodore Roosevelt had threatened to rein in the monopolies that flourished in various industrial sectors, notably railways.
7) Wall Street 1937-38: -49%
This share price fall was triggerd by an economic recession and doubts about the effectiveness of Franklin D Roosevelt's New Deal policy.
6) London 2000-2003: -52%
The UK took sixth place in the table with a 52 per cent market fall between 2000 and 2003 as investors suffered the consequences of the collapse of the technology bubble
5) Hong Kong 1997-98: -64%
The Hong Kong stock market's heavy fall in 1997-1998 came as investors deserted emerging Asian shares, including a very overheated Hong Kong stock market
4) London 1973-74: -73%
Next came the UK stock market's 73 per cent drop in 1973 and 1974. set against the backdrop of a dramatic rise in oil prices, the miners' strike and the downfall of the Heath government.
3) Japan 1990-2003: -79%
In third place, with a 79 per cent decline, was the Japanese stock market, which suffered a protracted slide in price from 1990 to 2003 as a share and property price bubble burst and turned into a deflationary nightmare.
2) US Nasdaq 2000-2002: -82%
The second biggest collapse came from the technology-rich US Nasdaq index, which fell by 82 per cent following the bursting of the dot.com bubble in 2000
1) Wall Street 1929-32: -89%
The Wall Street Crash heads this list, with the US stock market falling by 89 per cent between 1929 and 1932. The bursting of the speculative bubble led to further selling as people who had borrowed money to buy shares had to cash them in a hurry when their loans were called in.
I have previous quoted Charles Kindleberger who argues that there is a consistent pattern to financial manias and panics. He suggests that typically an upswing starts with new markets and/or new opportunities. The cycle then proceeds through the euphoria of rising prices often with the increased availability of credit fuelling the process. In the manic phase, investors find themselves scrambling to get in, changing their assets from cash to stock, commodities, tulips or whatever it is that is the current craze. Ultimately the market stops rising and people who have borrowed heavily find themselves over stretched.
According to David Shwartz, a stock market historian, "The very big stock market crashes are invariably triggered by a series of different events which unfold one after the other. One heavy blow is not enough to produce a market crash. It requires several different blows to bring a market to its knees." I seem to recall there were a number of major 'events' preceding the current downturn. Looking back it was obvious that this was a bubble just waiting to burst, but there again, it always is in hindsight.....
As I have said before (and will no doubt say again), human psychology leads to market prices being volatile.
(note: The above list focuses on stock market crashes in industrialised economies.)
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.