The Japanese stock market, which is recovering lost ground, is the longest in the history of a major economy. The Nikkei Stock Average has plummeted from its peak of 38,915 on December 29, 1989, and share prices have not reached their highest levels since the Great Depression triggered by the collapse of the Soviet Union in 1929-30 and World War II. This has left the nation disillusioned and individual investors bitter.
Stock market crashes occur when investors turn from buyers to sellers in the blink of an eye, which has happened relatively frequently in the past. In the US, there have been six major market collapses, with the stock market losing 10% of its value. Historians disagree about the number of such crashes in the United States and other major economies, but consider a market day when stocks fall by 10% or more.
What distinguishes a crash from a bear market? Crashes are often associated with bear markets, but they do not necessarily go hand in hand. Bear markets are periods of falling stock prices, measured in months or years. The term is usually used for steep price falls of 10% or more over a period of several days. There have been a number of severe market crashes in the US and other major economies.
In December 1929, many economists, including Keynes and Irving Fisher, believed that the financial crisis was over. The Standard & Poor's 500 Composite Index was trading at 25.92, compared with a closing price of 21.45. Ordinary shares were up 120 percent. There were those who thought that the stock market was not obviously overvalued in 1929, and that it was reasonable to hold on to most of the shares in the autumn of 1929 instead of buying shares afterwards. Admittedly, this investment strategy would have been terribly unsuccessful.
Prices began to fall in September and early October, and by October 18 the market was in free fall. A record 12.9 million shares were traded on the New York Stock Exchange as investors rushed to cover their losses. The wild buying frenzy gave way to an equally wild selling frenzy. Speculation continued, and in many cases was fueled by individuals who borrowed money to "buy" the shares - a practice that continued as share prices continued to rise.
In the 1987 calendar year, the Dow Jones Industrial Average gained six-tenths of a percent. The market rebounded the next day, recording its biggest one-day gain in more than 30 years. It took only two years for the Dow Jones to fully recover, and by September 1989 the market had recovered all the value it had lost in the 1987 crash.
To answer that question, we looked at cases where the S & P 500 fell below its previous high and analyzed how long the subsequent recovery took. After the crash, it took about six years for prices to recover to their all-time high. After the most extreme fall, it took the S & P 500 eight years to fully recover from the dotcom bubble that burst in 2000, immediately followed by the crashes of 2008. But after the September 11 plunge, it took only a year for the S & P to recover.
The average recovery time after the three bear markets was nearly 81 months. Investors have experienced prolonged bouts of volatility since the financial crisis, and it will be interesting to see whether this phase leads to a sense of complacency when the next prolonged period of turbulence arrives. If you're familiar with the history of the S & P 500 and its long history, it's easier to invest in stocks.
Analysts are also looking for external triggers. Herd behavior and psychological feedback loops play a critical role in stock market crashes. One consequence of the 1987 crash was the introduction of mandatory market closures in the US, based on the belief that a cooling-off period would help dispel investor panic, and whenever this occurred during a trading day, it triggered a massive sell-off of stocks and a steep decline in closing prices.
On Black Thursday, October 24, commonly seen as the start of the crash, the Dow Jones Industrial Average fell 25 percent from 305.85 points to 230.07 points. The stock market in the United States experienced rapid expansion from the mid-to-late 1920s. This continued in the first six months after the election of President Herbert Hoover in 1929 and then of President Franklin D. Roosevelt in 1933.
The Dow lost 22% on Black Thursday, ending a five-year bull market. Experts are still not sure what caused the stock market crash, but it was a crash that came out of nowhere. Although there were signs of slowing economic growth and rising inflation, there was nothing in the economic climate to predict such a sudden and significant decline.
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