Causes of market corrections/crashes

I was reading about the 1987 stock market crash as I was never sure what the exact trigger was, and this was what I found:

• Economic growth slowed in the first three quarters of 1987 and inflation was rising. Given the recent stagflation experience from the 1970s, investors were jittery.
• The stock market had declined nearly 10% the week prior to Black Monday which added to investors’ fears.
• Program trading using computers was relatively new and not sophisticated. The losses in the week prior to Black Monday and the losses at the open triggered computer program trading with little or no human intervention.

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To be honest, I was expecting something more dramatic for an almost 22% fall in the DJIA in one day. Have financial markets gotten more resilient since then? We have two serious regional wars raging, skyrocketing inflation, interest rates getting hiked to more than 20 year highs, the commercial real estate business is in the toilet after a relatively recent global pandemic, the populace is mortgaged to the hilt and drowning in consumer debt, and we still can't manage a decent stock market crash.

What has happened to financial markets since 1987?

greggles said:

I was reading about the 1987 stock market crash as I was never sure what the exact trigger was, and this was what I found:



To be honest, I was expecting something more dramatic for an almost 22% fall in the DJIA in one day. Have financial markets gotten more resilient since then? We have two serious regional wars raging, skyrocketing inflation, interest rates getting hiked to more than 20 year highs, the commercial real estate business is in the toilet after a relatively recent global pandemic, the populace is mortgaged to the hilt and drowning in consumer debt, and we still can't manage a decent stock market crash.

What has happened to financial markets since 1987?

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I think GG caused the 1987 crash.

After that, good question.

The Big Short (book) explains the last one pretty well.

Covid crash explains itself - outside market control.

69-79 wasn't flash. (imagine being an investor in the 70s? yikes.)

87-97 not that good.

07-23 almost even.

There's a basic principles for these cycles I think.

Something like: fear-greed-panic-desperation-war-peace-development-autocracy-democracy-socialism-capitalism-etc.

In the end, it seems to go up.

just from the thread title, I'm in the Minsky Moment camp for the actual event .

greggles said:

I was reading about the 1987 stock market crash as I was never sure what the exact trigger was, and this was what I found:



To be honest, I was expecting something more dramatic for an almost 22% fall in the DJIA in one day. Have financial markets gotten more resilient since then? We have two serious regional wars raging, skyrocketing inflation, interest rates getting hiked to more than 20 year highs, the commercial real estate business is in the toilet after a relatively recent global pandemic, the populace is mortgaged to the hilt and drowning in consumer debt, and we still can't manage a decent stock market crash.

What has happened to financial markets since 1987?

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I think there are a lot more financial controls.
Government and big business are involved in ensuring liquidity remains. Also market are more flexible.
However I think its like an elastic band. it can break.

I may have written once or twice prior to this, but here goes:
Those who fail to heed from the lessons of history are doomed to repeat its mistakes.


Mick

"Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
-John Templeton

I don't think these conditions are set for now. More likely, grinding along.

mullokintyre said:

I may have written once or twice prior to this, but here goes:
Those who fail to heed from the lessons of history are doomed to repeat its mistakes.
View attachment 175730

Mick

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So have you worked out which mistake you are repeating here?

red dot special: ●
presuming that was a DJIA chart


.
A much more dramatic and prolonged run-up then drop was in 2000, in sectors of the market . So, maybe some concern about recent manias is justified. Bitcoin, AI, anyone?

Dona Ferentes said:

"Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
-John Templeton

I don't think these conditions are set for now. More likely, grinding along.

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In really small letters it says S&P 500 .
Mick

mullokintyre said:

In really small letters it says S&P 500 .
Mick

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Thanks Mick.

And one of my charts, the DJIA, was log scale, for disclosure

in general the stock market is a confidence game

let's use BHP as an example , i hold BHP because i think it can survive most disasters , make a profit most years ( and pay a dividend most years )

now some might think like me but use a margin loan to increase their earnings and when very confident even invest nearly all their spare cash , when an adverse event comes along ( like the tailings dam disaster ) , those leveraged and cash stressed investors worry a LOT more than holders like me ( i normally have a bit of cash to spare and MIGHT buy in the dip but nowhere near enough to buy all the stock stampeding investors need to sell ) and i am normally waiting down say minus 20% to 25% , so that stampede has a lot of momentum by then

so the cause is always over-confidence , followed by a rapid loss of confidence ( often your margin-lender is the first to get ultra-nervous ) the trigger can be almost anything , but the panicked/forced selling does the damage , whether it is computer-generated or the retail folk possessed by fear it is irrelevant , it is sellers overwhelming willing buyers

now you can avoid most of this by sitting there one day and thinking oh wow i am up xx(x?) % maybe i should lock in some profits ( and build that cash buffer ) ( or some use other strategies ) and not over-stretch your resources

it is very much a guessing game about when the market will actually slump down , i saw September 2019 and started taking measures fearing a wave of bank collapses , as the market kept climbing i took more and more defensive measures , i did NOT see the lock-downs coming , but i was already ( cash-wise and mentally ) prepared for a meltdown , i just didn't know the triggering event

( and i probably won't guess the next trigger either , but i can see the market is very uncertain currently )