What caused the recent stock market crash?

Really a GQ sort of question, but I’m putting it in GD because there’s bound to be disagreement.

Too many people attempting to sell their shares.

What, just this past week? That qualifies as a crash?

There is only audio, no transcript, but I found the interview with Tess Vigeland on Friday’s Marketplace informative. (Of course, I cannot vouch thhat it correct.)

I believe the market is nervous over the mortgage industries woes.

Right - the subprime mortgage industry is still doing badly, which has spread to other areas.

And “crash?” Nah. The markets were up strongly on Tuesday and they weren’t down that much this week.

The U.S. stock market? There hasn’t been a recent crash.

But losses are likely to continue. Look at the recent CBOE Volatility Index (VIX); rising sharply in the last month. Now look at the VIX plotted against the Dow for the last 17 years; notice the declines in the Dow after volatility climbs rapidly?

I think we are in for a bumpy ride.

Maybe its the prospect of Bush and the Republican’s losing the WH…


(A downturn in the market does not equal a crash. Just saying…)


That’s pretty much what “volatility” implies.

Not really, volatility is not one way; volatility is up and down.

I know what volatility means. But if volatility goes up, you’re probably going to see downward movement as well as upward.

The graph I linked to indicates that in periods of high volatility, the market moves downward or is flat, and during periods of low volatility, the market moves upward. For th last month, we have been in a period of very high volatility. At best, this would indicate a flat market, but I am less optimistic.

Well, a retired stockbroker I know, who still plays the market a lot, told me he lost 15% of his net worth in one day. If that’s not a crash, I hope I never live to see one.

Not only has this last week not been a crash, it was barely even a correction, and the market is overdue for one. For the week no major index was down more than 0.5% after having lost about 6% the week before. Indeed it was volatile and bounced around getting there and some individual stocks and some individual investors with narrow portfolios* have been beat badly, but overall not bad at the end of the day. Mainly the market is acting like a bunch of six year olds playing soccer - all chasing the ball as a mass. “It’s going down! I gotta get out!” “It’s going up!I gotta get back in!”

As to why, well most of us have read and heard all about it: fall-out from the sub-prime debacle. No one knows exactly who is going to get hurt and how badly. These loans have been repackaged, collateralized, and rebought and all across the world institutions are at risk. How much exposure do the major banks actually have? No one knows. No one knows how the reaction to this debacle will effect growth either. Will lenders over-react and tighten up lending so tight that growth is impeded? Or will most be able to weather the squeeze? Will a greater difficulty in getting mortgages further exacerbate an already quite soft American housing market? If the Fed cuts interest rates will it help or be read as a sign that the problem is actually worse than people thought? Rational analysis goes out the window as the twin winds of panic and greed swirl in and out.

My take is shown by the fact that tomorrow I’m selling my shares of stock in a company that hasn’t been at all effected and buying up some shares in a publically traded REIT with mainly commercial investments but which has lost 50% of its value over the week and now has a dividend rate of 20%. I like overreactions. They give me a chance to get some bargins. And if the “crisis” makes the takover tycoons and hedge fund speculators a bit more cautious in the future, all the better to me.

*BG, did your retired stockbroker freind happen to tell you how much he was up for the year before things just dropped?

Brain Glutton, one day and one person’s 15% loss is not a crash. 1987’s problems were not a crash. 2001’s problems were not a crash.

And BG to keep it in perspective, the S&P500 is still up 15% from where it was a year ago, and the NASDAQ is still up 23% from where it was a year ago. Like I said, barely a correction.

Go to #5 of the linked “Cartoon Gallery.” THAT is a crash. Anything less is just part of the game.

Last week I lost 3.5% of the value of my IRA. I got back half of that within two days, then gained a percent and then gained half a percent, and lost it back.

So, after a volatile week, I still have around 99 percent of what I had a week ago. Of course, since I didn’t buy or sell anything last week, I really gained nothing, and lost nothing.

I have a fairly diverse portfolio, or at least as diverse as I can with only 11 stocks.

So, as others have asked, what crash?


“As scarce as truth is, the supply has always been in excess of the demand.” ~ Josh Billings ~

You forgot the part about the insufficiency of willing buyers at the then present prices.