This autumn has brought about a sharp decline in stock markets, with indexes falling 9-12 lower this year’s peak rates. As a matter of fact, the fall is at such scales that it undermines all the gains made by Dow Jones Industrial Average previously. Today’s situation can be described as one step forward two steps backwards, as 2-per cent decline of the Dow will be followed by a rise for one per cent and eventual drop by 1.5 per cent back and so on.
Now, let’s take a look at the historical experience.
The 20th century saw The Great Depression, a severe economic downturn, arguably the worst in human history. It started on October 24, 1929 (known as Black Thursday), when the Wall Street stock market collapsed and went on to bring down the entirety of the word’s economy.
Today’s situation might be different as every historical period is exceptional; thus, all the industrial and technological advancements of the recent years, the introduction of automated trading, new ways of passive management (such as the ETFs or other ETPs) have made the modern stock investing incomparable to that of any other historical era. Yet, one thing still remains as negative now as it was in the 1930s – that is the public morale.
Despite general pessimism, we are not on the verge of a second Great Depression, though there is a chance we might get there at some point. For now, the world’s economy is doing pretty well, with relatively low levels of unemployment and steady growth in the economy. Besides, The National Bureau of Economic Research (NBER) monitors possible recession and will be quick to report at the first sign of trouble.
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On top of that, one must not equate the stock market and economy. While they definitely influence each other, instability of the first not necessarily causes problems for the later. Finally, according to Michael Batnick, during the last 3 decades stock markets spent a long time rising than falling thus resulting in overall 669% gain for the index.
What happened during the recent days was unexpected, as companies are flooded with money and tax benefits, while people are ready and able to buy. As such, you would expect to see a flourishing economy, instead of frightened investors are selling everything they can and Companies like AT&T and Netflix, suffer losses. Something similar has already happened in 2015, but the consequences will never be the same because history never repeats itself.