For everyone who held their breath as they watched the stocks in 2021, hoping the blanket wouldn't be removed, July 19 was certainly not their day. Then the stock market had its biggest hit of the year, the Dow Jones fell 2.1%, the S&P 500 fell 1.6% and the Nasdaq fell 1.1%. Oh, and for the record, by the end of the week, the market has rebounded. So do we see a stock market crash for the rest of 2021? Let's take a look at some key points (with a cool and collected head) to better understand where the market is going.
What is a stock market crash?
A stock market crash is a sudden and big drop in the value of stocks, which causes investors to sell their shares quickly. When the value of stocks goes down, so does their price—and the end result is that people could lose a lot of the money they invested.
To get an overall idea of the value of stocks, we look at indexes (that’s something that tracks how well stocks do) like the Dow Jones Industrial Average (DJIA), the S&P 500 and the Nasdaq. If you look at a visual graph of one of these indexes, you can see why we use the term crash. It’s like watching a plane take a nose dive.
Examples of stock market crashes
Throughout history, the market has seen extreme volatility. When we look back, we remind ourselves that, yes, a stock market crash is a very difficult thing, but it is something we can and will overcome.
The Great Depression, 1929: The DJIA fell nearly 25% in a matter of days. It took a little over a decade for the economy to return to pre-depression levels. It was the WWII industry that helped move things along.
Stock Market Crash, 1987: The market lost 22.6% of its value in a day known as Black Monday. But in two years, it got back everything it had lost.
September 11, 2001: Terrorist attacks did a great deal of market success, but it recovered itself very quickly. Barely a month later, the stock market returned to September 10 levels and continued to rise until the end of the 2006.
Great Recession, 2008: the DJIA lost more than 50% of its value in a very short time. In some years the market was stronger than ever - we were essentially in a bull market (a period of strong economic growth) from 2009 until just before the coronavirus crash.
What causes the market to crash?
A stock market crash is caused by two things: a dramatic drop in stock prices and panic. Here's how it works: Shares are small shares of a company, and investors who buy them make a profit when the value of their shares increases. The value and price of these shares are based on how investors believe the company will perform. So if they think the company they are investing in is going through a rough patch, they sell those stocks to try to get out before the value drops. The reality is that panic plays as much of a role in a stock market crash as the actual economic problems that cause it. Let's review an example from the coronavirus pandemic that shows you how powerful panic is. As news of the virus spread, grocery stores and convenience stores around the world ran out of toilet paper within days. Has there been a shortage of toilet paper? Well yes and no. There was no shortage before people started to panic. But when people lost their minds and started stocking up on toilet paper, their actions created a shortage! The same kind of panic can trigger a stock market crash. Once investors see other investors selling their shares, they get pretty nervous. Then the value of the shares begins to decline and more and more investors sell their shares. The next thing you know, they all run out of stock and the market is in a real crash.
Did coronavirus affect the stock market?
Suppose we have a time machine that takes us back to March 2020 when the corona virus was officially declared an epidemic (don't worry, we won't last long). The world economy was in turmoil as people watched Tiger King or flocked to the supermarkets to buy toilet paper. Supply chains stopped. All industries shut down overnight. And the stock market fell, big time. In the early days of the epidemic, the stock market swept us all. Global markets (not just here in the US) have plummeted, leading to a short-term bear market (where the stock market falls by at least 20%) and an economic downturn in the coming months. If you were reviewing your 401 (k) during these days, you may be nervous about running out of savings. But after an initial setback in March, the market rallied. And when New Year's Eve ball fell on December 31, 2020, the stock market made up for all the lost ground - and more! Did you understand that All major indexes rose in 2020: 9 S&P 500 rose 15.6%. The Nasdaq rose 43.8 percent. The Dow Jones rose 6.5 percent.
So will it crash again?
Well, let's say that. A one-day fall in stock prices in July does not mean that "big things" are in progress. To be honest, we cannot completely predict whether the stock market will collapse for the rest of 2021. Imagine what happened last year. This cannot be compensated for. So will the stock market plunge in 2021? We can only see what affects the market and your investment throughout the year. The good news is that major financial analysts are forecasting steady growth in 2021.
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