Saturday, 28 March 2020

My View On What Causes Market Crashes

Many Stock Market indexes have now rebounded approximately 20% from their lows. Now market spectators are divided- some say this is a technical rebound and the bottom has not arrived; while another group says the Monday close was the bottom and we are out of the woods.

I will weigh in my thoughts on market bottoms, based on what I observed of the GFC 2008-2009

GFC 2008-2009 Bottom - 2 Bankruptcies in 2 Industries

There were two events that triggered US markets to crash each time. I will be basing on the Dow Jones Index Performance as a reference.

The first was the collapse of Lehman in late Sept 2008. This resulted in the Dow crashing from its 11,000 point level. The crash happened for a period of market days and the Dow only stated to range bound when TARP was officially implemented in Oct 2008. The Dow remained at the 7000-8000 levels for the rest of the year after this. However, this did not spell the end of the market crash.

The second event was the collapse of the US automakers where a bailout was announced in Dec 2008 and was finally implemented in March 2008. Again the Dow crashed over a 2 months period and only stopped its decline when the US government officially took control of GM and Chrysler in March 2008. The second event caused the Dow to fall from the 8700 levels to the 6500 mark.

From these 2 events, my view is that it takes the entire implementation of a policy before markets will regain normalcy. And if there is a bankruptcy in another industry, markets will collapse and only stabilise when the subject industry stabilises.

Back to 2020

By now, we know the collapse of airlines have been starved off with countries providing credit lines to their airlines. For our markets to resume normalcy, the proposed legislations have to be implemented. As of now, US has signed its legislation but has not put it into place yet. 

Hence one may expect things to be volatile for the next few months until the official implementation. After that, the next order of thinking is if there are any more industries that are poised for bankruptcy. 

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