A global market crash is a rare event, but they do happen. When they do, they shake markets, trigger selling sprees and destabilize financial institutions. In the worst cases, they can even lead to government bailouts and economic collapse. Market crashes also have long-term effects on investor confidence and risk tolerance.
It’s no wonder that investors are nervous. Since the COVID-19 pandemic began, the Dow and S&P have already fallen by more than 12%, and both have been flirting with bear market territory.
But these drops are nothing compared to what happened in late March of 2020, when the COVID-19 outbreak turned into a global stock market crash. The indexes plummeted in a matter of weeks, leading to a sharp correction that saw stocks drop nearly 40% over just four months.
The panic began in Asia and rolled westward like a tidal wave. As prices fell, automated program trading kicked in, triggering further selling and accelerating the decline. Investors fled emerging markets, and the Russian government devalued the ruble and defaulted on its domestic debt, sending the market into a tailspin.
It took 18 months for the market to recover from this downturn. It may take just as long or longer to recover from future shocks that slow growth, raise inflation and alter trade and supply chains. That’s why it’s crucial for policymakers and market insiders to understand the causes of these crashes so they can avoid them in the future.