I’ve got an idiot co-woker who fancies himself a reliable commentator on what he reads on the internet. Periodically during the day, he checks the NASDAQ, the DOW, and the NYSE, to see what trends appear to be developing. To the best of my knowledge, he has no stock portfolio of his own (although he has mentioned a cousin who has money in the market). Therefore, I’m not real clear on what his purpose is in checking the stock averages. No matter; if he gets a kick out of it, more power to him.
Anyway, he seems (in my view, at least), to have a very low threshhold for what he considers to be a stock market crash. And every time he sees the average go down by five points or so, he comments (out loud), “The stock market crashed.” I’m seriously considering asking him to dial that back, but I’m hampered by my own inability to understand financial markets (and disinclination to learn).
So my questions are: is there any consensus benchmark for the size of a decline in overall market value that would allow an observer to state: “This is a stock market crash,” or; “That is not a stock market crash,” based solely on the size of the drop (whether it be in absolute dollar amounts, or percentages)? And if so, where would that benchmark be?
The greatest U.S. stock market crash was in October 1987 when the Dow Jones Average fell 22 percent (not points) in a single day. On three different days in October 1929, the market fell by more than 10% in a single day.
The Dow closed today (Wednesday) at 10,816. That means it would require a fall of more than 1,000 points to fall 10 percent.
The 100 or so point differences the Dow experiences daily are about 1% of market value.
One percent is definitely not a crash. Ten percent definitely is.
The crash bank in 1929 may have been only 10% on the first day but it just kept falling until something like only 10% was left. One very rich man lost his entire fortune when he kept buying as the market fell. His intent was to stop the fall of the market but his efforts went to no avail.
What happened in 1987 was a crash of sorts since it was so large for just one day, but soon afterward the market went back up. The lessons it taught were probably worth far more than any damage it did.
It might not be far off to treat any fall in the market the same as any other event in history. You may be living history today, but it won’t be until later when it is determined just what is happening. Any stock broker worth his salt will tell you to invest for the long run. If you get excited about every up and down you are in for a lot of trouble.
I’m not saying that the Crash of 1929 should be measured only by single-day totals. But the OP said his “idiot co-worker” defines a crash as five points or so.
Five points out of 10,000+ point scale just ain’t a crash. Five points a day for three months wouldn’t even count as a crash.
In cases of extreme losses, trading can be restricted or halted altogether. I think the most recent total suspension of trading was after the 9/11 attacks, when the markets closed for three days or so.