How far would the stock market have to drop before it was considered a crisis? To those who have no stocks, theres no problem, right?
If it very slowly declined, would everyone lose money and the U.S. fall apart?
What if it rose unusually high?
A 10% decrease over a very short time starts to get into the very bad territory. The crash of 1929 was about 13% and the even worse crash of 1987 made a drop of about 22%. A crash like that affects everyone, not just those who have stock. The economy is tied together in a complex web. If the people with stock lose money, the won’t be as likely to hire people or buy things. That effects everyone and the whole economy can go into a tailspin. I don’t see how a long, steady and slow decline could happen (it would more likely plunge and hold and then repeat) but that type of thing is bad. People want to make, not lose money in the stock market and a long-tern decline is very bad. It is more complicated that that though and you would see other forces at work such as deflation which is also generally bad. People don’t invest when they think their money is going to lose value through investments. Instead, they squirrel away hard cash because they think it will be worth even more tomorrow than today. That has a negative effect on the economy as well.
Overvalued markets that rise quickly are called bubbles and the most recent one was the dot.com boom of the late 1990’s. That can be bad as well because the inflated and fragile nature of the markets sets things up for a sharp fall in which people lose money quickly and that makes the markets unstable for a time. Instability is bad in either direction.
How far the markets drop before a crisis ensues depends. There is no hard and fast answer for the question. If the markets have shown a steady uptrend for several quarters, a sharp drop over a week or so might be considered a short-term correction . . . or a sign of things to come . . . by investors. Much depends on external factors: war, political instability overseas, etc. It’s best to understand not just the numbers in the market, but the reasons investors jump out or in the markets at a given time. After the “crash” of 1987, the markets bounced back because overall, the economy was still strong (low unemployment, no inflationary pressures, etc.) – unlike the 1929 crash that helped send the country into the Great Depression. Sometimes markets correct because of over-valuation of stocks, and investors take profits after a nice run-up.
In the 1970s, the markets were down for a few years, and it was bad for large and small investors, though not as many people were in the market then as there are now. Those who stayed in the market came out the other side bruised, but not completely defeated and it took a while to build markets up. IMHO, a gradual market decline for more than a year or two now would probably impact more individuals who are invested in 401(k) and IRA stock plans, delaying retirements. Another affect would be that corporations may not have the capital to spend on expansions, improvements and the like, and cut back. It would have a ripple effect on the economy, for sure.
Disclaimer: IMNA stock broker, but an avid market watcher.
My dad was quite interested in the market. I recall him saying something along the line that the market has always shown a profit over any decade, including the decade with 1929. (I’m not sure how he calculated “decade.”)
I also remember a broker friend of mine trying to explain the severity of the late-90s downturn to me by explaining that it is not like poker where losses go “to the house.” With stocks, there is no house. Lost value is simply gone.
I tend to buy and hold longterm, so temporary downturns generally are only “paper losses”, most often outweighed by prior or subsequent gains, or gains on other issues.
Here is what the NYSE uses to shut down trading in the event of a major drop in the Dow.
It took 25 years for the stock market as an average, to break even after the '29 crash. Memories are long, and so people stayed out of the market for a long time, when they should have been buying with both hands. In the 1970’s, I think it was Newsweek, had an article “The Coming Ice Age”; no wait, it was “The Death Of Equities”, a few years later they had “The Return Of Equities”, once the market showed rebounded.
It’s more important to stay fully invested, for most of us anyway, than anything else provided the time horizon is enough - stocks in the short term are extremely risky, but among the safest and most profitable over longer time periods. Long term is not five or ten years. And being out of the market on just a few days out of decades is enough to kill any hope of a decent return. This is why for a lot of people, maybe most - a portfolio of indexed mutual funds is the best course.