Why stock markets crash

Throughout the book, Sornette makes numerous, vivid comparisons with many other fields in which the various mathematical tools he describes can be applied. This work is bound to become an important baseline for anyone trying to understand what will happen next in the stock and currency markets not only in the U.

It is written by an expert in a very straightforward style and is illustrated by many clear figures. Why Stock Markets Crash will surely raise scientific interest in the emerging new field of econophysics.

This book is different. First, it is written by an internationally recognized expert in non-linear, complex systems. Second, it promotes some new ideas in both finance and science. In addition, it offers the general reader an insight into finance, both practical and academic, as well as some of the issues at the cutting edge of science. There were also rumors of public ownership and a shifting of control.

The next day October 17 , the Times reported p. Massachusetts was not alone in challenging the profit levels of utilities. New York Governor Franklin D. Roosevelt appointed a committee on October 8 to investigate the regulation of public utilities in the state. The Chairman of the Public Service Commission, testifying before the Committee wanted more control over utility holding companies, especially management fees and other transfers.

In New York City Mayor Jimmy Walker was fighting the accusation of graft charges with statements that his administration would fight aggressively against rate increases, thus proving that he had not accepted bribes New York Times , October It is reasonable to conclude that the October 16 break was related to the news from Massachusetts and New York.

On October 17, the New York Times p. On Black Thursday, October 24, the market panic began. The market dropped from The declines were led by the motor stocks and public utilities.

Public utilities were a very important segment of the stock market, and even more importantly, any change in public utility stock values resulted in larger changes in equity wealth. Market price per share The public utility holding companies, in fact, were even more vulnerable to a stock price change since their ratio of price to book value averaged 4.

For simplicity, this discussion has assumed the trust held all the holding company stock. The effects shown would be reduced if the trust held only a fraction of the stock. However, this discussion has also assumed that no debt or margin was used to finance the investment. The vulnerability of the margin investor buying a trust stock that has invested in a utility is obvious. These highly levered non-operating utilities offered an opportunity for speculation.

There were also holding companies that owned holding companies e. Wigmore p. These stocks were even more volatile than the publicly owned utilities. The amount of leverage both debt and preferred stock used in the utility sector may have been enormous, but we cannot tell for certain. When the large amount of leverage is combined with the inflated prices of the public utility stock, both holding company stocks, and the investment trust the problem is even more dramatic.

Although no consensus has been reached on the causes of the stock market crash, the evidence cited above suggests that it may have been that the fear of speculation helped push the stock market to the brink of collapse. The resulting decline in stock prices weakened margin positions. When several governmental bodies indicated that public utilities in the future were not going to be able to justify their market prices, the decreases in utility stock prices resulted in margin positions being further weakened resulting in general selling.

At some stage, the selling panic started and the crash resulted. What can we learn from the crash? Barsky, Robert B. Bradford DeLong. Bierman, Harold, Jr. The Great Myths of and the Lessons to be Learned. Westport, CT: Greenwood Press, The Causes of the Stock Market Crash. Westport, CT, Greenwood Press, Committee on Banking and Currency.

Washington, DeLong, J. Kendrick, John W. Productivity Trends in the United States. Princeton University Press, Moggridge, Donald. New York: Macmillan, Rappoport, Peter and Eugene N.

Samuelson, Paul A. Wigmore, Barry A. Greenwood Press, Westport, Citation: Bierman, Harold. Net Encyclopedia, edited by Robert Whaples. March 26, Please read our Copyright Information page for important copyright information. Send email to admin eh. Newsletters To join the newsletters or submit a posting go to click here. Harold Bierman, Jr. Were Stocks Obviously Overpriced in October ? Debatable — Economic Indicators Were Strong From to the third quarter of , common stocks increased in value by percent in four years, a compound annual growth of Events Precipitating the Crash Although it can be argued that the stock market was not overvalued, there is evidence that many feared that it was overvalued — including the Federal Reserve Board and the United States Senate.

What precipitated the October crash? The market did not fall just because it was too high — as argued above it is not obvious that it was too high. The actions of the Federal Reserve, while not always wise, cannot be directly identified with the October stock market crashes in an important way. The Smoot-Hawley tariff, while looming on the horizon, was not cited by the news sources in as a factor, and was probably not important to the October market.

Business activity news in October was generally good and there were very few hints of a coming depression. Short selling and bear raids were not large enough to move the entire market. Fraud and other illegal or immoral acts were not material, despite the attention they have received. Wednesday, October 16, On Wednesday, October 16, stock prices again declined.

Monday, October 21, On Monday, October 21, the market went down again. The Times October 22 identified the causes to be margin sellers buyers on margin being forced to sell foreign money liquidating skillful short selling The same newspaper carried an article about a talk by Irving Fisher p.

Wednesday, October 23, On Wednesday, October 23 the market tumbled. An Interpretive Overview of Events and Issues My interpretation of these events is that the statement by Snowden, Chancellor of the Exchequer, indicating the presence of a speculative orgy in America is likely to have triggered the October 3 break.

Contemporary Worries of Excessive Speculation During , the public was bombarded with statements of outrage by public officials regarding the speculative orgy taking place on the New York Stock Exchange. Investment Trusts By , investment trusts were very popular with investors. Seven important types of information that are not readily available but would be of interest are: The percentage of the portfolio that was public utilities. The extent of diversification.

The percentage of the portfolios that was NYSE firms. The investment turnover. The ratio of market price to net asset value at various points in time. The amount of debt and preferred stock leverage used. Who bought the trusts and how long they held. The Public Utility Sector In addition to investment trusts, intrinsic values are usually well defined for regulated public utilities.

The Public Utility Multipliers and Leverage Public utilities were a very important segment of the stock market, and even more importantly, any change in public utility stock values resulted in larger changes in equity wealth. Conclusions and Lessons Although no consensus has been reached on the causes of the stock market crash, the evidence cited above suggests that it may have been that the fear of speculation helped push the stock market to the brink of collapse.

There is a delicate balance between optimism and pessimism regarding the stock market. Statements and actions by government officials can affect the sensitivity of stock prices to events. Call a market overpriced often enough, and investors may begin to believe it.

A levered investment portfolio amplifies the swings of the stock market. Some investment securities have leverage built into them e. A series of presumably undramatic events may establish a setting for a wide price decline. A segment of the market can experience bad news and a price decline that infects the broader market. In , it seems to have been public utilities.

In , high technology firms were candidates. Interpreting events and assigning blame is unreliable if there has not been an adequate passage of time and opportunity for reflection and analysis — and is difficult even with decades of hindsight. It is difficult to predict a major market turn with any degree of reliability. It is impressive that in September , Roger Babson predicted the collapse of the stock market, but he had been predicting a collapse for many years.

Also, even Babson recommended diversification and was against complete liquidation of stock investments Financial Chronicle , September 7, , p. Even a market that is not excessively high can collapse.

Both market psychology and the underlying economics are relevant. References Barsky, Robert B. Commercial and Financial Chronicle , issues. Federal Reserve Bulletin , February, Fisher, Irving. The Stock Market Crash and After. Galbraith, John K. The Great Crash , Boston, Houghton Mifflin, Hoover, Herbert.

The Memoirs of Herbert Hoover. New York, Macmillan, Kindleberger, Charles P. Manias, Panics, and Crashes. New York, Basic Books, Malkiel, Burton G. Reacting to the fear, Nifty Midcap and Nifty Smallcap index nosedived 6 per cent each, with nearly all of their respective constituents in the red. India recorded 1,69, Covid cases in the last 24 hours, the highest ever daily increase in infections. Uncertainty in the market continues with increasing risk arising from rising Covid infections in India in the context of a third wave in parts of Europe.

The second wave of infection in India has resulted in reimposition of lockdown in several parts of the country, meaning business disruptions. Moreover, the rise in yields is likely to result in outflows. In numbers, investors lost Rs 5. Every minute of Friday's trade cost Rs 1, crore to stock investors. Sensex loses 1, points on global selloff, Nifty below 14, Earnings growth in the medium term is going to be reasonably good but the problem is with growth expectations. The BSE Sensex and the Nifty lost further ground in the afternoon trade as selling intensified after European markets mostly opened lower.

Traders say profit booking also emerged ahead of the presentation of Union Budget on February 1. The sell-off in the market was led by banks and Reliance Industries. As of pm, the Sensex was down points or 2. Sensex plunges over points, Nifty breaks below 14, mark. The share pack Sensex crashed 1, In percentage terms, it was its biggest fall in seven months. Its broader peer NSE Nifty plunged Volatility indicator has also surged significantly, highlighting the nervousness among traders.

Losses in indices were, however, checked as US lawmakers finalised talks on a massive stimulus deal. Bluechip indices have rallied for 10 straight days, the biggest rally in 13 years, and have shown signs of fatigue in the last few days. The market selloff eroded Rs 3. Led by weak sentiments, market capitalisation of BSE-listed firms declined to Rs Covid has eroded the wealth painstakingly built over the past years.

The bigger danger is that many first-time investors may turn away from equities forever even as a pauperised populace cuts back on consumption. Vijay Kedia, MD of Kedia Securities, on past experiences of the biggest market falls and how to navigate this bear market. The Chairman of IIFL Group says the government should wait for a week or two, look at the scenario and then come out with a comprehensive package, which can aim to minimise or mitigate job losses to start with. As the stock market resumed trade after a 45 minute halt, indices trimmed losses and the BSE Sensex was trading lower by around points.

Market trims losses as trade resumes, Sensex down points. Previous market crashes have shown that stocks that lead the uptick before the peak are usually the ones that correct the most. In the rout, tech stocks took a beating while many industrials suffered in Sensex down by 2, points.

Analysts say it is a good time now to set aside some money for MFs and systematic investment plans. As the bears took control of Dalal Street on Monday, investors lost some Rs 3,00, crore worth of equity wealth. Certainly, not a great start to the week! Take a look. Rs 3,00, crore equity wealth gone: What triggered this collapse. Special situations investing is a strategy that one uses to take advantage of certain corporate events that throws up money-making opportunities for short periods, says Gaurav Sud of Kanav Capital Advisors.

How to make the most out of stock market crash? It is that time when as an investor you are required to be extra vigilant and avoid knee-jerk decisions. According to lore, a surge in inflation would lift interest rates, causing bond prices to decline and thereby wrecking bond portfolios. The current stock market crash has wiped out most of the gains, taking their current price below January 31, , cut off for LTCG tax.

Should mutual fund investors be worried? One of the reasons why this selloff is so unsettling is the difficulty of pointing to familiar culprits, be they economic, geopolitical or corporate-related. ET takes a look at blue chips. China's economy is going through a rough patch, and fears things could get worse have been exacerbated by the recent crash of the country's market.

The recent financial market volatility has many people wondering if this stock-market decline will turn into a bear market. The Sensex hit a week low last week. Find out if this is a short-term market correction or the beginning of a bear phase.

The crash has been a bitter pill for the real economy, and will be a huge comedown for policymakers. Xu and several other executives of Zexi were arrested on charges including insider trading and stock market manipulation, the Post quoted official media as reporting. According to Credit Suisse, the stock market crash is becoming an issue for the country's growth, and as a result.

Here are top five reasons why the Chinese stock market made a smart recovery towards the close of today's trade. The Shanghai Composite Index has fallen 27 per cent in less than a month - a huge drop compared to the per cent gain over the last eight months.

Applied to data between and , the method shows that increases in searches for business and politics preceded falls in the stock market. With the Sensex witnessing its worst fall in two-and- a-half months, the total market capitalisation of BSE listed firms declined by Rs 1. Continuing its downward spiral, the BSE Sensex today tanked by points at the close of the trade. If you had to choose between gold and silver, what would you choose?