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Crashes are not just an indication; they can also mean that the market is going from being hopeful to being scared, which leads to a lot of selling.
This went against what most economists thought, which was that inflation and unemployment couldn't both go up at the same time. The market didn't fully recover until 1980, making it one of the longest recoveries in modern market history.
Research done with the Massachusetts Institute of Technology reveals that the number of stock market crashes follows an inverse cubic ability law.
Speculation and economic bubbles: When investors become overly enthusiastic, stock values can rise well above their true value, creating a bubble. When reality settles in and the bubble collapses, prices might drop significantly, as happened during the dotcom bubble of 2000.
For long-term traders, the best moment to sell is when the market has hit bottom and recovered before. This is bad advice for policymakers and market insiders who need to find the market in a crisis.
The table below shows the bear markets that have happened in the last 150 years, in order of how bad the stock market plunge was and how painful it was.
The fall of 1929 and the first part of the Great Depression had a pain index of 100%. The percentages for the subsequent market crashes show how closely they matched that level of intensity.
When we compare this market crash to earlier ones on the table, we can see that the 28.5% decrease in the stock market over that nine-month period was worse than the Cuban missile crisis and many downturns from the late 1800s to early 1900s.
As the dollar sank, speculators looked for a safe place to put their money, and Treasury bonds rose. Prices of oil went up a little, and prices of gold went down.
Japan's bubble in share and housing prices burst and turned into a long deflationary slump that lasted for around 20 years, till the end of 2011. The 1997 Asian financial crisis and the dot-com bubble are two of the most important events that happened after the Japanese asset price bubble burst.
The six-year-old bull market is no longer racing ahead, just like how men and women move more slowly but surely as they get older. But it can still move bigger.
This crisis happened because the post-World War I economic boom, which caused people to be too confident, spend too much, and inflate prices too much, was no longer sustainable. It took the market more than four years to recover from this downturn.
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